What matters

The news was enough to freak Amy out. Like she needed more of it.

The economy’s shrunk faster than a dude in a lake – 8% in March (and half of that month was pre-virus). This is Great Depression stuff. Imagine what the April and May numbers will be. Ugh. Also a bank just cut its dividend. So are things starting to unravel?

Here’s her situation, and her fear.

I have been reading your blog for years, and while I was in a relationship, had my money invested jointly.  When the partner parted I moved to a self directed brokerage (TD Waterhouse) and that worked well for me over the past five years.  I have since retired, living on CPP, OAS, GIS and dipping into my TFSA dividends to make ends meet.  I rent an old apartment in Hope BC; after a lifetime in Victoria, I couldn’t afford to retire there.

Before COVID my portfolio (maxed TFSA & RRSP) was at $100k, not much to speak for, but two divorces and 16 yrs of being a single mom, has been devastating financially.  Given the present global situation, my portfolio is down 35%.  I am prepared to ride it out, however a close friend is impressing the “inevitable ” on me, meaning now the banks will fail and I should sell off my investments and buy silver and gold.  I can’t afford to get this wrong.  Your thoughts?

First, Amy, the ‘bank’ cutting its dividend is more like a glorified credit union. The Laurentian Bank has been lackluster for years, forced to pay off staff and close 50 branches in Quebec. Total assets are $35 billion, which sounds like a lot. But the Royal Bank is worth $1.5 trillion, and probably has a few billion lying around for pizzas-&-beer on Fridays.

So, none of the Big Six will be cutting, suspending, trimming or otherwise diddling with their dividends. No bank will fail. Never will there be any bail-in provisions triggered. Your bank-held assets are safe and dry.

Now, this does not mean the bankers aren’t sweating a few bullets, thanks to Covid. These ae testy times on Bay Street, which is why bank stocks shed about 20% of their value since the virus came to town. Eight million Canadians are on the dole and almost a million can’t/won’t pay their mortgages. Tons of small business clients are going paws-up over the next few months. Defaults on home loans are expected to increase, as are consumer bankruptcies. HELOCs, car loans, business LOCs – lots of debt will sour.

In response, the banks have set aside almost $11 billion to cover these anticipated loan losses. Doing so has crashed their profit numbers, but it was the correct action. Says TD’s chief financial officer: ““What we’re living through here is an unprecedented shutdown of large segments of the economy, which is impacting consumers and businesses and customer activity in unprecedented ways. We’ve looked at our provisions and applied a good measure of prudence to make sure that we are prepared to weather this pandemic.”

Amy, babe, worry about something else. Not the banks. They’ve got this handled.

So, about your portfolio. Let’s start there. If it tanked 35% you’re not balanced, not diversified and had way too much equity exposure for a wrinklie (or anyone else). A B&D portfolio shed far less than stock markets  and has steadily crawled back since then. With a hundred grand in two registered accounts, you should have just a few positions – balanced ETFs with exposure to North American and international markets plus some bonds and REITs. If you have no preferred fund, this is the time to get one. Cheap. Six per cent yield.

The worst possible move would be to go to cash, then buy a bunch of rocks. Gold and silver are purely speculative, highly volatile, pay no interest, no dividends, no income. You can’t easily trade this stuff (especially in rural BC), nor can you chew off a hunk to buy groceries with at Save On. Bullion is the emotional crutch of the prepper set, and goes nice with semi-automatics, sheep manure and the Old Testament. But it has no place in the modern portfolio of a retired, single woman who needs dependable cash flow.

Now, will things get worse?

Of course. What happens when the CERB, the mortgage deferrals and the emergency business loans/rent subsidies end? More contraction. Many business failures. Household distress. Forced property sales. Just what you’d expect when the jobless rate stays north of 10% and the free government money ends. This is the scenario the bankers are readying for with their eleven billion in bad-money reserves.

At that point anything can happen. The T2 gang might keep the benefits going, ensuring that your grandchildren’s offspring are taxed mercilessly. Or maybe the virus sneaks back. And what about the US election in November? How does that possibly end well?

All of this you cannot know, Amy. Nor can anyone.

But this is not our first disaster. And pandemics are temporary. You may think it’s different this time. It is not.

Even if it were, fretting over events you cannot control only wastes what matters. Without time, nothing has value. Even in Hope.

How it ends

Some years ago, when this blog was still pithy (instead of just pissy) we summed it all up this way: the rich hold assets. The rest hold debt.

Well, the virus sure has underscored that piece of news. Since hitting a panicked low in the third week of March, the US stock market has careened higher 39%. In nine weeks. Stunning. In fact if you went to sleep a year ago and snoozed through the entire global pandemic mess, awakening this morning, you’d think equities just had a great 12 months – up 11.2%.

Balanced and diversified portfolios are recovering well, despite crashing interest rates hurting fixed income returns and the virus rattling REITs. Oil prices have come back from the grave. Commodity prices have revived. Volatility, as measured by the Vix, has cratered by more than half. So the gauges of fear are being turned off while the measures of confidence are soaring.

This is Bay Street. Wall Street. It’s not Main Street. One thing we told you Covid would do is widen the gap between investors and borrowers, between those who own real assets and those who hold financial ones. Endless buckets of liquidity from governments and central bankers have flooded capital markets, created demand for tradable securities, floated the bankers and backstopped corporate woes. As a result, stocks are up. ETFs based on them are peachy. Credit is flowing normally. And all the grief the virus brought has been dumped on the shoulders of others. Deficit-addled governments. Millions of newly-unemployed. Hundreds of thousands who can’t pay their home loans. Besieged small businesses. And, soon, mortgaged homeowners.

This week an interesting war’s played out. Re/Max marketing dudes on one side. The country’s housing agency on the other. The realtors insist housing markets will revive fast from Covid, that prices have so far held steady and a limited number of new listings will keep it that way as buyers stream back from their social distancing. CMHC boss Evan Siddall is warning talk like that’s irresponsible, dangerous and misleading.

“Some vocal real estate advisors have labelled us ‘panic-inducing and irresponsible,’ saying essentially that house prices don’t go down. They’re whistling past the graveyard and offering no analysis,” he Tweeted. “Please question the motivation of anyone who wants you to believe prices will go up (yes, up) with our economy in slow motion, oil being given away, millions of Canadians on income support and a greater % of mortgages not being paid than we’ve seen since the Great Depression.”

Yesterday this pathetic blog listed some of the reasons Siddall makes sense, and Re/Max blows smoke. When the people who have given up are counted, the jobless rate is 20%. Almost a million families can’t, or won’t, pay their mortgages. The savings rate is below 1% and four-in-ten households went into this mess living paycheque-to-paycheque. Unemployment is not going back to 5% by Christmas. Or even next Christmas. And look at bank earnings reports this week – one after another the big guys are setting aside massive amounts for bad loans while revealing a crash in profits. The appetite for risk is falling by the hour. People who can’t pay their mortgages are credit risks.

The Main Street economy is in dogawful shape thanks to politicians who killed it, then paid people not to work. Jobs won’t coming back soon. A third or more of all small businesses will not reopen. Restaurants can’t survive on 50% social-distancing capacity. The tourism season is finished. Hotels dying. Convention hosts, hockey players and rock stars living under bridges now that the audiences are gone. And how many part-time gigs disappeared when the Calgary Stampede, the PNE or the Ex in Toronto were scrubbed?

What Siddall is saying is that those who claim real estate’s immune from this are delusional. Or worse. They’re lying. Houses sell to people who have (a) jobs and (b) access to credit. With unemployment likely to stay at double-digit levels for a long time, and the banks under historic pressure to reduce risk and cleanse their loan portfolios, how are we going back to peak house?

Sure, seriously reduced supply and greater-fool demand will keep prices aloft for a while, but the yellow flag is out. CMHC issued a special warning in the last few days for first-time buyers. If prices fall – even modestly, it said, the indebted will be creamed.

But we already knew that.