Entries from October 2020 ↓

The Big Plan

– chantallevesquephoto.com

My, my. A third of Canadians tell pollsters they’ll “never” recover from the Covid crisis. Four in ten say they can’t withstand a second wave. As many state their financial lives have totally sucked since March. Worst hit? Those in their forties and fifties. Half say recovery is impossible and they’re already depleting savings to get by.

Are these people just being drama queens? Hasn’t residential real estate and a cheap mortgage made everybody rich?

Nah. TD economists say 97% of us haven’t bought, sold or moved since the pandemic began. All this added wealth is illusory at the moment. More important are jobs and cash flow.

So where’s the bug at this week?

Not good. Over 81,500 new infections and a thousand fresh deaths in the US yesterday. New peaks are being hit. Can a hundred thousand daily cases be far off? By election day maybe? In Europe, it’s a big mess. France, Germany and the UK are being whacked. New lockdowns. Economic activity curtailed. As a result, (a) stocks are taking a beating, especially in the absence of a US stimulus package (they’re still arguing) and (b) poor Alberta. Oil plunged another 6% on Thursday because the virus is taking cars and trucks off the road, destroying demand.

Cases are way up lately in most of Canada, too. But relatively speaking we’re a paradise. Still, the defeatist attitude is telling. And here’s what it says: most people have more debt than assets, savings and investments are inadequate, they live paycheque-to-paycheque, the bulk of net worth is in one asset meaning their ability to survive for a few months in a changed world is, well, close to zero.

Real estate did that. You know it. We’re a one-trick-pony nation now. Hell, a quarter of the entire GDP might as well have “MLS” stamped on it.

Sadly, our central bank is bent on rendering the situation worse.

This week the Bank of Canada was very careful to make three things clear: rates will not be going up until 2023; it’ll spend billions a week buying long bonds so mortgage rates stay artificially low; and dig this statement –  “It means that if you’re a household considering making a major purchase you can be confident that interest rates will be low for a long time.” Yup, the Tiffer actually said that. He might as well have suggested he send over his realtor brother-in-law to see you and have a brewski.

And just to reinforce this, the BoC’s latest report states: “More than a quarter of respondents to the Canadian Survey of Consumer Expectations in the third quarter of 2020 reported they would like to move to a larger or single-family home because of the pandemic.”

Okay, here’s the deal. The Big Plan for Canada to get out of this virus mess and rekindle the economy is obviously for you to by a house. Any house. Hopefully a giant mudda with a bloated mortgage. The government and our central bankers are counting on residential real estate to stay hot, thanks to cheap money and lots of FOMO, in order to achieve the very ambitious 4% annual growth rate (2021) spelled out earlier this week.

Figure it out. Oil is crazy in trouble. There are four million people on the pogey. Our biggest trading partner is out of control. Whole sectors of the economy won’t be coming back for a few years. The CB is out of bullets. And Ottawa has already spent more money than God. So they want you to do the heavy lifting by running off to buy a property at an inflated price with a massive amount of financing.

Okay, got it. But don’t we already know this is financial folly?

Of course. Look at those poll results. Half of middle-aged folk say they’re pooched. And 70% have real estate. In fact, 20% of all those folks were part of the can’t-pay-the-mortgage crowd for the last eight months. Increasing home ownership rates and household debt – already off the charts – is not a clear path to financial security. In fact if the virus gets worse, lasts longer or results in regional lockdowns, many will suffer.

Meanwhile pumping up real estate values further will only increase the wealth divide by making it more unaffordable for many. How does that square with the Liberal-leftie pledge to sock it to the rich?

In short, the plan The Authorities have for us is manipulative, cheap and tawdry.  I’m shocked.

The opportunity

What do we make of a few ugly days on the markets?

Well, speculation grows a certain American president that this blog cannot name (until after  Wednesday) may not cede power if he loses the vote on November 3rd. You might wish to read this. Could it lead to conflict in the streets, while the virus – despite politics – continues to infect 75,000 people a day?

And, wait, could that guy (you know who) actually be ascending again? This is so confusing. Here’s how crusty old Street vet Ed Pennock saw it today…

The market looks like it’s selling on news. In our view, Trump is surging again. He’s got a big hill to climb. But that makes the election now very difficult to call. Markets hate uncertainty. Biden has the numbers but will they hold? A record 67 million people have already voted. We are heading for a record turnout. Probably outside the statistical parameters that they have been using to make forecasts. The news about CVD is anything but good.

Yeah, the bug. Europe’s got it bad. Italy, France, the UK, Spain, Poland – lots of places are seeing bigger case numbers and more hospitalizations than in the spring. Mr. Market is not happy with these developments. A US regional lockdown could be coming. It means economic disruption, people buying fewer pickups and designer sweats (big these day) at a time when vacations, air travel and fancy restaurant meals are already kaput. GDP down. Blood pressure up. More layoffs. Closures. People stress and vex, then do silly things like sell perfectly good assets into a storm.

On Tuesday our prime minister said all of this “sucks” and you probably should expect Christmas to be cancelled. And now we have the latest from the Bank of Canada, which has been spending billions each week keeping your mortgage rate low. The highlights from Tiff:

  • No rate change. In fact the cost of money will stay low until inflation (now 0.5%) hits two per cent
  • When’s that? “Not until into 2023.”
  • US growth is fading considerably. In Canada it will “slow markedly.” Virus.
  • Our economy will shrink more than 5% this year then grow 4% for the next two. “Considering the likely long-lasting effects of the pandemic, the Bank has revised down its estimate of Canada’s potential growth over the projection horizon.”
  • The bankers will continue to depress mortgages by spending “at least $4 billion a week” buying long-term bonds… “which have more direct influence on the borrowing rates that are most important for households and businesses.”

Hmmm. Is this good? Green light to buy a house? Or stuff your TFSA with cheaper ETFs?

Well, here’s what we know.

First, yes, mortgages will stay cheap. The central bank says rates will remain low for at least two years until the economy recovers enough to throw off inflation. If this is not the bottom for home loans, we’re close. And without a doubt, cheap money fuels real estate – so long as enough people have jobs.

Reality check: five-year fixed-rate money has never cost less than it does now.  In other words, why would you pay off a 1.8% loan? So, don’t. Take the cash you’re not spending on a monthly payment and invest it, especially when neat things like equity ETFs are on sale.

Second, never, ever, ever (ever) forget this will pass. Pandemics are temporary, not permanent. Even if a vaccine never arrives, the virus would burn out in time. The race now is to save as many people as possible from infection and death and thereby shorten the episode, through medicine and public health measures. (This is why the herd immunity theory is nuts. Worse, it’s mass murder.) Wear your damn mask.

Third, government stimulus will flow like Bandit’s drool over a liver treat, which is a sight you won’t easily forget. There’s a 100% certainty a multi-trillion-dollar package will pass the US Congress, whether it’s before or after the vote. CBs will continue to do what our guys pledged today – keep rates crashed and hold the taps open with billions in quantitative easing (QE). The combo of this fiscal and monetary stimulus will keep the lights on and markets supported until the bug departs.

So, fourth, when assets fall in value, pay attention. It’s why this blog has pointed out (for example) that some DT Toronto condos selling for $700,000 seven months ago are now less than $500,000. Or why a day when the equity market loses 3% of its value is a great time to do a little fund shopping. Of course, there could be a bunch more volatility over the coming days and weeks (mostly depending on the virus and the, ah, other thing), but you get the point. If the world’s destined to look a helluva lot better in 12 or 20 months, then go vultch.

There. See how much better you feel about complete mayhem?