Sheepless

There will be no capital gains tax inclusion rate increase in the budget next Monday. No creeping tax on realized home equity, either. And no wealth or inheritance tax.

That’s the will of the Liberal grassroots, as expressed in the policy conference just completed. Add to that comments by the federal housing minister (‘no capital gains on residential real estate) plus a major TV interview by Ontario MP and housing policy dude Adam Vaughan (‘we can’t penalize homeowners counting on their houses for retirement’) and the conclusion is inescapable….

The feds intend to let the market run hot. They’re also scared about whacking investment capital or the TSX during a nascent post-bug recovery. So accountants everywhere can stop fretting.

But, but, but. The odds are large for a new tax bracket Hoovering off more from the high-income crowd, boosting the top marginal to 55%. Maybe a tad more. Just listen to that giant sucking sound. By the way, no hike slated for overall corporate tax rates, as the Third Wave crashes hard into employers. However, count on a lot more spending, continued deficits and a relentless increase in public debt (not that anyone cares any more).

The Liberal rabble wants a UBI, which is doubtful. They also want a free drug plan for everybody (more likely) and universal cheap child care (a certainty). Our finance minister has declared this a ‘shecession’, called the loss of female jobs because of Covid ‘dangerous’ and pledged to have the state far more involved in kiddie welfare.

In short, the budget on Monday next will raise little in new revenue, commit to a huge amount of new spending, kick the can of debt/deficit down the road so Gen Z can deal with it when they stop watching TikToks, probably guarantee a nice house in a decent hood slides further from reach and sets the stage for a federal election in the autumn, right after herd immunity arrives.

Oh, one more thing…

“I’m an irritating millennial living in Vancouver,” writes Allison. “I earn well above the median household income in this self-important village of a city. I’ve been looking at buying a condo for the last 3 years and haven’t pulled the trigger because (1) everything I can afford as a single person sucks; and (2) my rent-and-invest strategy is working out pretty well.

But – I live in a crappy rental apartment that is hundreds of dollars below market. If I want to move I will pay at least $700 more per month in rent. That’s a big dent in what I can invest each month. So why do rents feel like they are increasing so much faster than income is? How is the grotesque real estate situation influencing or not influencing that? How can rents possibly be limited by local incomes when median household income is around $75k? I would love for you to write a post that digs into how rents are or aren’t related to real estate craziness and local incomes and what it means for the finances of the average person.

Actually, Ali, renters are subsidized, coddled, supported and made special by politicians who suppress rents, ban evictions and hassle landlords. The costs of home ownership far exceed those faced by tenants, even in an age of cheap mortgages. If it were not for emotional market gains and tax-free profits, renting would be the totally valid choice. There’s no other compelling reason a young, single female (or male) would accept hundreds of thousands in debt, plus monthly fees and expenses to live in a place they could rent without care or obligation, investing the difference.

But we’ve lost our way. Real estate’s a cult now. Governments have fostered and helped create that. Prices are extreme and homeowners have become the elite. The maiden Chrystia budget will not have the stones to tax windfall capital gains, but it might just throw a bone to rising voters like Allison in the form of a rental tax credit.

The logic: if people buying real estate get a massive wealth advantage by completely avoiding taxation on gains which were handed to them by Mr. Market, renters should not be penalized just because they cannot afford to buy. So it’s only ‘fair’ the government levels the paying field by allowing a portion of rent to be deducted from taxable income.

Yeah, more government dependence and debt through reduced revenue. The T2 hole deepens.

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As of this week the word ‘master’ will no longer be allowed in Toronto. At least not as part of real estate listings. Toronto realtors have decided to follow the lead of CREA, the national organization, and cancel the word forever. From now on no master bedroom. No master ensuite, either. The politically-correct word is ‘primary.’

Why?

Master is “largely associated with terminology rooted in slavery and/or sexism,” the realtors say. It has “offensive undertones”, is an “outdated term” and inhibits “productive communication between real estate professionals and their communities.”

Of course, if there is a ‘primary’ room in a house it means the others must be ‘secondary’ or worse. That seems a bit hurtful, exclusionary, elitist and smacks of privilege. How will the people sleeping in those diminished places feel? Perhaps they need compensation.

Anyway, it’s progress. The Mills love it. And this jibes with the loss of other innocuous but banned words many grew up with, like “Dominion” or “fisherman.” Could there be a master plan?

Oops.

About the picture: “Our Holly is our 16-month-old Sarplanenac,” says blog dog Sue.  “She is a Yugoslavia Mountain Dog.  They were bred to guard flocks cattle and sheep.  We are sheepless so she guards us.  She’s loveable and beautiful. You are welcome to use her photo.”

The loonie

RYAN   By Guest Blogger Ryan Lewenza
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The four most common questions I receive from clients are: 1) will the equity markets and my portfolio be up this year; 2) how I can pay less in taxes; 3) how do you maintain your boyish good looks and chiseled abs when you’re so busy looking after clients; and 4) where is the Canadian dollar headed. I look forward to the thrashing I’ll receive on the third question in the comments section but today I’ll address the last question on where the Canadian dollar is headed.

The Canadian dollar has been on a tear! Since bottoming around 69 cents to the US dollar last March, it’s rallied over 15% to roughly 80 cents currently. The strength in the Canadian dollar can be attributed to a few key factors.

First, oil prices have come back strongly since going negative for a day last March (that’s one for the books!). Second, the Bank of Canada (BoC) has announced that it will start winding down its emergency bond buying program in the coming months, being the first major central bank to end these emergency programs. And third, general weakness in the US dollar versus most currencies with the Federal Reserve keeping the ‘pedal to the metal’ by continuing to inject massive sums of monetary stimulus through their bond buying programs.

But stepping back the Canadian dollar has been largely range-bound for over six years now. Since oil prices collapsed from over $100/bl in 2014 it has taken the Canadian dollar down with it, falling from par or $1 to a low of $0.685 in 2016 (there was a re-test of these lows in March of last year). So from the chart below you can see the CAD has been range-bound between roughly $0.70 (technical support) and $0.80 cents (technical resistance).

Question then is: is the CAD on the verge of a big breakout or is it set for more range-bound trading?

Canadian Dollar Has Been Range-bound for Years

Source: Stockcharts, Turner Investments

Let’s start with oil prices.

While there are times when the relationship between the Canadian dollar and oil prices will disconnect or weaken, over the longhaul, oil prices still play a prominent role in where our dollar goes. As oil prices have come roaring back, in large part, due to expectations for higher demand when we get control of Covid, this has helped to drive our dollar higher as well.

Last year I predicted that oil prices would recover back to $60/bl where we currently stand. I’m getting more bullish on commodities as demand and inflation pick up (commodities do well in an inflationary environment) so we could see oil prices move a bit higher (possibly hit $70/bl this year), but I do not see oil prices hitting $90-100/bl any time soon so upside is fairly limited from here. As such, this should help to limit further upside in the Canadian dollar.

CAD Strongly Correlates With Oil Prices

Source: Bloomberg, Turner Investments

Next up is the ‘interest rate differential’ or the difference in government bond yields between Canada and the US. If our interest rates are higher than the US (as they are currently) then this is bullish for the Canadian dollar.

With the BoC announcing that it will be winding down its bond buying programs well ahead of the Federal Reserve, this has led to an increase in Canadian bond yields and our interest rates being higher than the US, which is supportive of the dollar. However, the BoC will still likely stay close to the Fed’s policies since they can’t risk hiking rates ahead of the US and our dollar moving much higher. Given this view I don’t see our interest rates moving materially higher than the US, so this should also help to limit further upside in the CAD.

Lastly, based on these factors (oil prices and interest rates), I developed a financial model that helps forecast ‘fair value’ of the Canadian dollar. Based on my expectations for oil prices and interest rates, my model suggests fair value at 81 cents, very close to its current level. Once again this suggest limited upside in the CAD from current levels.

Canadian Dollar Model Suggests Fair Value of 81 Cents

Source: Bloomberg, Turner Investments

Ok, time to bring it on home!

Based on my expectations for the factors discussed above, my financial model that suggests limited upside, and the range-bound trading pattern of the Canadian dollar, odds are we’re closer to a short-term top than a major breakout to the upside. Given this view we recommend investors/clients to stick with their US dollar investments and you may want to consider buying some US dollars for that vacation that you’re likely to go on next year as Covid begins to retreat.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.