Entries from April 2020 ↓

The reckoning

The dichotomy continues. The market goes up. The economy goes down. A lot of folks, understandably, don’t get it. They want black. They want white. Some even hate me

Like Matty, who sent this anguished note after yesterday’s post on some of the things to expect post-virus:

It’s actually incredible the amount of two-faced garbage you spew sometimes Garth. One day you make it seem like the pandemic is a temporary blip then you show how much of a fear mongering, view-grabbing blog poster you are. I’ve followed your blog religiously for the past several years, and while you’ve given some great advice, your approach to navigating this pandemic has been dismal at best. If you can’t see for yourself how conflicting your posts have been, I’m not sure anyone will be able to convince you otherwise.

Well, there’s a reason. This blog is a daily version of history. If we were dealing with something static, defined and distasteful, like a Drake video, analysis would be easy. But this is a virus. The first global pandemic of our lifetimes. And we have a questionable crop of leaders feeling their way through it. Suddenly the economy is being run by doctors while politicians are trying to be public health officials. The future’s messy. Nobody ever before has turned off the entire economy. Or tried then to turn it on again.

But Matty boy is right. When talking about financial assets, markets and portfolios, this blog has told you to be confident, hold tight and expect a reasonable result. When it comes to the economy and its impact on most people, it’s a far different story. So, why?

On one hand, the world’s a mess. There are now 30 million Americans on, or applying for, government largesse. The true number of unemployed is believed to be copiously higher. This is approaching 1930s Grapes of Wrath levels. In Canada, as noted, eight million are out of work and on the dole – which is unprecedented. Shut companies, idled workers and locked-down shoppers are gutting government revenues, as public spending soars. The Parliamentary Budget Office on Thursday confirmed the federal deficit will be the largest in history. By miles. Over $252 billion – ten times the pre-bug prediction. Mr. Trudeau will go down in history for that alone.

More mess. Only one in ten small businesses apparently qualify for federal rent relief, and four in ten will not reopen. By the way, mom-and-pops employ about eight million people, or 70% of the Canadian workforce. The GDP may decline by 25% in the second quarter of 2020 and unemployment in both Canada and the States will hit 15% or greater. Some say 30%. Corporate earnings will be ugly. Analysts estimate S&P companies will see profits decline by 34%. That’s double the last estimate of a couple of weeks ago.

We could go on. Dairy farmers are suddenly hit because all the restaurants and hotels are shut. Movers are idled because people aren’t buying and selling houses. People with Airbnb properties, hotels, tour companies, cruise lines or fishing lodges, are freaking out. Distributors are being crushed since there’s little demand for jet fuel. YVR just laid off an army of people. Shell has cut its dividend for the first time since the Second World War. Oil companies are bleeding big. Former deputy PM John Manley, a major Lib insider, says it’ll take ten years to get over Covid.

There’s no point sugarcoating any of this. It sucks. The longer things stay closed the longer and more difficult the recovery. Much will never be the same. Less bank branches. Hoardings along Main Street. Way fewer flights (and more costly seats). Structural unemployment and deficits along with tax increases.

In the new world many people won’t work again. Some companies will blow up. Whole sectors will shrink. Offices will close. Cities change. The points made yesterday were not to monger fear or grab views, but to probe how an unknown event might rock our world. If nothing else, the virus has exposed how vulnerable and victimized a nation of house-lusty, over-leveraged and financially illiterate grasshoppers we are. No savings, no reserves and no ability to last just a few weeks without a paycheque. Did you think so many lived so close to the edge? Is it not time to change?

But as all of the above unfolded, Mr. Market has held another theme. That gauge of fear, the Vix, has collapsed by 60%. The gauge of confidence, the equity market, has jumped 32% from the lows of late March. This despite the virus carving a hole in the economy and corporate earnings while hobbling governments and throwing millions out of work.

Investors with balanced and diversified portfolios saw a plop of 15% or more when the pandemic bit, but have regained most of their losses – now off just a few points. As tough as it might be to grasp when looking at the social carnage, markets absorbed and reflected Covid’s impact and now anticipate recovery. Pandemics are temporary. Like Kevin O’Leary or Svend Robinson they just go away if you wait long enough. Better things emerge.

And, of course, markets are being buoyed as never before by runaway fiscal and monetary policy. All those trillions in government spending and bond purchases along with crashed interest rates pour liquidity into the economy, make financing cheap and bail out corporate losers. This week the Fed boss said the central bank’s “full range of tools” would be used to prop things up and, “we will do it to the absolute limit of those powers.” So this is why the S&P is ahead 13% in a single month.

More to come. There will be volatility. Expect some brutal days. But those who ignore their properly-weighted portfolios will do just fine, even as the virus tortures millions and tears down their standard of living. This is the reckoning many thought would someday come. It’s here. In the loins of a germ.

As with the rest of life, the outcome is unfair.


Now what?

How much will taxes pop?

Some of the answer will come Thursday morning. The Parliamentary Budget Officer is an independent guy, not part of the government, the PMO or Trudeau’s Liberal caucus. In short, he has creds. So what the PBO will announce in the morrow should be taken seriously.

Three weeks ago, amid a gush of federal virus spending, the PBO estimated the federal deficit would be an eye-watering $184 billion. That’s the amount the government must borrow to cover excess spending in a single year. The new estimate will top $200 billion. And Trudeau continues to spend.

The country’s current federal debt is $715 billion, growing $75.8 million per day. Adding $200 billion in a single year is unprecedented. Staggering. The previous record belonged to Stephen Harper, who spent $56 billion above revenues in order to survive the 2008-9 financial crisis.

So what happens when a country increases its debt by almost a third in the space of 12 months?

“Let’s hope this spending is temporary,” the PBO says. “Otherwise it is unaffordable. Had you asked me two months ago if we would be contemplating a deficit of close to $200 billion, I would have said that somebody is smoking something very strong.”

So time to talk about the post-pandemic nation that we will inhabit. What will it look like? How will the new normal operate? As provinces take halting steps towards letting people shop and work, where are we headed? For how long will civil liberties be curtailed and behaviours forced to modify?

Here are some thoughts on what comes next:

Somebody has to pay for all this.
Taxes are going up. Accountants are bracing for the creation of yet another tax bracket, skimming up to 60% of incomes of the top 1%. But that won’t pay for much, since we have a dearth of rich people. Look for a bump in the capital gains tax inclusion rate, real estate levies, more means-testing of benefits and possibly an inheritance tax. For starters.

Personal service is doomed.
Scotiabank employees got a memo this week saying: “Our ‘new normal’ is unlikely to be us resuming our ‘old normal’ in terms of how and where we work.” That means not re-opening hundreds and hundreds of bank branches which BNS and the other guys closed in late March. It’s a golden opportunity for corporations to slash employee overhead and dump costly real estate, pushing clients online and forever ending much human contact.

Shopping won’t be fun.
Malls are dead. They’ll be the last retail areas to open, with restrictions and a lot of shopper hesitation. Mall landlords are choking, but restaurants are simply dying. Social distancing means no more will Timmy’s be the community hub nor will people wish to fine-dine when served by a comely babe in a mask and gloves. Get used to lining up for urban grocery stores.

Small business whacked.
Almost 80% are shut now and four in 10 won’t open again, says the CFIB. Online shopping weakened this social backbone and the virus broke it. What a profound, sad loss it will be when the small-scale entrepreneur class is forced down.

Fewer offices. Dead downtowns.
White-collar corps have learned to handle remote workforces over the last six weeks. Zoom is the new god. Commuting is done. Dogs love it. Companies will seriously reconsider vast, expensive downtown offices. Spoke-and-wheel organizational structures will emerge. City-center streets will empty. Urban transit routes will thin. Downtowns will never again be what they were so long ago. In February.

Real estate migration.
It’s already on. Less appeal to living in a congested area when the virus turns into a seasonal and recurring threat. A renewed interest in the burbs and beyond. Single family houses, not concrete towers full of strangers. The ability to control your space, safeguard your family and not have some degenerate sneeze on you. Besides, since you don’t need to commute DT any more, why not be safe?

Some will never work again.
Before Covid we had 5% unemployment. Now it’s 15%, maybe more. Many stores and eateries are done forever. Companies like the banks downsizing. Hotels, airlines hobbled for a long time. It’s likely the jobless rate will be double-digits for a while. Maybe it’ll be structural. How will these folks be supported?

The spigot can’t be shut.
After politicians turned off the economy, they had to support the people they idled. Thus, a $200 billion deficit, as the direct deposit tsunami gushed out of Ottawa. Everybody who wanted some got cash. But how does it end? How does the government just turn it off when the economy may take years to reflate? Are we many steps closer to a Universal Basic Income? If so, who pays the staggering, recurring cost?

Less freedom.
A video surfaced this week of the nation’s medical goddess, Dr. Theresa Tam, once musing that in a pandemic citizens should wear personal identification and face forced vaccinations. Current opinion polls show a scared populace might now find that acceptable. Fewer freedoms likely lie ahead. Sadly. Some countries use apps to track every citizens’ moves. Crippling news for philanderers. And cowboys.

More Trudeau.
In mere weeks the pandemic has changed politics dramatically. Terrified by governments and media, Canadians have rallied around leaders as in a war. Trudeau’s 74% approval rating is unheard of for a modern leader – even as he has broken electoral promises, been caught in a black-face past, brought on a debt storm, manipulated justice, raised taxes and now shuttered the economy. If he calls an election this fall, Canada will have a majority Liberal government.

Looks like a certain pathetic blog will be busy. Gather the horses. We ride at dawn.