Entries from July 2020 ↓

Deeper & deeper

Did you think it would take this long? Me neither.

The hammer came down mid-March. Now it’s August, almost. Yesterday Scotiabank says it  decided few, if any, workers would return to its gleaming, 68-storey Toronto head office tower at King & Bay Streets in 2020. In the spring. Perhaps. Google announced a few days ago its people are gone until next summer. It’s a long list of companies gathering.

Schools may or may not reopen in September, depending on where you are. Some will be in shifts. There’s big doubt it can even work, with kids in masks, six feet apart. A few sniffles and the place will be an evac zone.

Well, the economic implications cannot be overstated. Social distancing and employers running from risk mean we’re staring at uncertainty, unemployment and financial stress for months to come. Maybe two years, until that mythical vax hits your arm. To date about $60 billion in income loss has been made up in CERB payments while employers flow through even more in payroll subsidies. Monthly obligations have been waived through large-scale payment deferrals.

The question: how long can this last?

When it comes to mortgages the answer seems to be another 120 days. As of now about 800,000 households have stopped making payments. Those who quit in March are set to resume in September. Many will. Many won’t. Many can’t. Canada is a nation of debtors with families carrying $1.6 trillion in mortgage loans, more than $180 billion worth not currently being serviced. Debt has spiked in the past year, mostly because all the missed mortgage payments are being added to the amount owing. Folks wo think this is a ‘mortgage holiday’ were not paying attention.

So what comes next?

Australia may give us a clue. That, too, is a land of unfettered real estate lust and widespread house horniness. Property speculation is a national pastime, and politicians have shamelessly pandered to it. As a result, big Aussie cities have (like Toronto and Vancouver) insane housing prices and an economy way, way, way too dependent on citizens flogging houses to each other. (The Australian GDP is just a little smaller than ours and 15% of it is real estate-driven. Yeah, like us.)

We have 37 million people. They have 25 million. We both have 800,000 people not paying their home loans. And everybody’s worried.

Like ours, the Aussie government facilitated a six-month mortgage deferral period, and in recent days this has been extended by another four. But it is not automatic. The extension will be granted only to those who are in financial difficulty, find it impossible to make mortgage payments, and can prove it. Those who cannot establish hardship will be expected to resume payments, or to sell their real estate. As for the others: “Customers will be expected to work with their bank, during this extra time, to find the best solution for them,” says the Australian Banking Association. “It is in their interest to repay debt sooner.”

You betcha. Because every missed payment means borrowers owe more. Real estate equity is diminished. Financial positions are weakened. Net worth affected. Credit tarnished.

(By the way in the UK, where almost two million people deferred mortgage payments, there are media reports banks have been given the green light to deny renewals or new financings to people who took the loan holiday. A survey of brokers found 59% have had clients rejected due to a loan deferral or the fact they’ve been receiving a support cheque – like the CERB. It is folly to think lenders in Canada aren’t keeping the same records, nor that consequences won’t flow.)

So, what next here?

Soon, in the next week or two, CMHC will tell the mortgage deadbeats what their options are. Yes, an extension will be offered and, yup, probably four months – no payments until January of 2021. But this time will not be like last time, when everybody and his cat got approved for a deferral. As this pathetic blog reported then, lenders were absolutely besieged with requests (many from people perfectly able to pay but who didn’t want to, or were scared) and rejected nobody.

The missed payments are being capitalized – added to the principal, then amortized. Borrowers owe more. Monthly payments will rise. But the no-pay party will still come to an end for a boatload of people come the autumn. Only those folks who might quickly slide into default will be thrown a new lifeline.

That will come in the form of more months of deferral, but only when the lender (not the government) determines the homeowner doesn’t have the resources to pay; an extended amortization of the outstanding loan, reducing future payments but increasing accrued interest;  a negotiated restructuring; or further capitalization of future payments. In all of these instances, be aware that your credit will be impacted – whatever codswallop you might have read about deferrals being risk-free.

And what happens if tens or hundreds of thousands of people with mortgages still can’t pay when the winter comes?

Well, let’s see what Finance Minister Chrystia has to say then.

When fear wins

If you’re a wuss, these are tough days.

Not only do you need to fret about being infected while shopping for prunes at Loblaws, but the whole financial world seems, well, nuts. The stock market might have jumped 48% since the end of March, rewarding risk, but savers and equity scaredycats have been seriously whacked by Covid.

In fact the decline in returns on guaranteed assets has been breathtaking. Especially at the banks.

Since the virus came to town and CBs responded with emergency rates, savers have seen their investments sink into negative territory. GIC rates have collapsed by about half – from levels that were already punishing to the prudent.

For example, the banks now pay roughly 1% to lock up money for five long years in a non-cashable GIC. There are a couple of outliers, like Tangerine, which still pay a little over 2%, but that’s unlikely to last. One-year rates have sunk to between 0.5% and 0.6% at the banks, while a cashable GIC (if you can find one) is down at 0.45% for a one-year term and 0.6% for three years. Ouch.

This is a disaster for the no-risk folks. The inflation rate, even in a pandemic with eight million people on the dole, is 0.7%. As the economy reopens and spending picks up, this will rise again – likely to the central bank’s target rate of 2%, then beyond. So anything paying less is underwater. Plus, if the GIC is not in a registered account like a TFSA or RSP (and what a tragic misallocation that is) the piteous dribble of interest is also fully taxable at your marginal rate. Even worse, on a multi-year GIC you must pay tax on interest you have not yet received. More ouch.

How long will this last?

Ages. The next central bank rate increase is widely expected in the first quarter or two of 2023, and that’s if we get a vaccine in 2021 with much of herd dosed within the following twelve months. This will allow the economy to more fully reopen, the airplanes to fly full, concerts, pro games, cruises, business meetings and conventions to resume, hotels to fill, malls to populate and the tourism industry to revive. Growth, along with higher rates and better yields, will return – but so will inflation. In fact, with governments spending bazillions of bucks now, you can be assured the cost of living will expand.

For savers this means a neverendum exercise in tail-chasing. Savings rates will eventually, slowly increase, but so will living costs (and likely taxes). Even if a GIC ends up returning a glorious 5% in 2025, the CPI will probably match it. The real return could be zero – which is an improvement over the negative yield savers are now receiving.

So, unless you have a few million to nibble your way through during two or three decades of retirement, you need to change. Stop fearing everything. Understand that by absolutely eschewing risk you’re also waiving off growth, opportunity and a more secure financial life. Don’t underestimate the amount of income you will need after you retire (never, ever believe this myth that retirees can exist on CPP, OAS and unbridled sex), or the number of years you’ll live. Retirement calculators abound, so use one. If you save little during your working years, you’ll probably need to replace almost all your income when you stop. From that deduct the government pogey and whatever corporate pension you might have (most people have none) to establish the shortfall that investment income must cover.

Now run the numbers. A nestegg in GICs paying less than inflation means your capital is exhausted even before your libido is. But a portfolio with a long-term return of 6% or 7% (the average for a balanced and diversified one over the past half century) could mean a forever income stream, a richer life, and some dough left for your ungrateful offspring.

There are lots of good alternatives to brain-dead guaranteed investment certificates. Shares in the big banks are sometimes clobbered by events (like Covid) but they always recover, pay a juicy dividend four times higher than a 5-year GIC, with lower taxes. By the way, our big six banks have never missed a payment. Preferred share values have also been whacked by lower interest rates, but they keep on turning out a 5-6% income stream for investors – and as rates rise in the future (they will – this is the bottom) so will capital values. Best to access these through a diversified pref ETF. Plus you pay less tax than with interest.

Over the past decade we’ve experienced everything but asteroid attacks and locust plagues (actually there are several infestations at the moment). A US debt ceiling crisis. Two oil price collapses. Trade wars. Brexit. Trump. Adele. Hong Kong. Impeachment. Extreme weather. Drake. And a global pandemic. Through it all, a B&D portfolio has returned just over 7%. Incredibly, there are lot of people who – freaked out by the 2008-9 market turmoil – have been in cash or near-cash assets for the past eleven years. They basically have the same money now that they did in 2010, while the guy with a balanced portfolio has doubled his.

Yesterday we talked about the bullion-lickers who buy gold because they believe the world’s ending, we’ll turn into Argentina, or markets are rigged. Many are blinded by their distorted world view. Ditto for the savers, the GIC-afflicted, the insanely risk-averse and those traumatized by headlines.

Don’t stay on the margins. Never let fear be your guide. Act to achieve a goal, not to avoid a threat. Don’t gamble. Do not recoil. Trust what’s coming.

In other words, live like your dog.