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It’s here

hillary-modified

With a creepy accuracy of almost nine out of ten, the American stock market has picked the next American president since 1928. When the S&P advances in the three months prior to the big vote, the incumbent party wins. When it doesn’t, the other guy gets in.

The score so far: the market’s down. A fair amount actually – about 4% since the beginning of August. At the same time the goofy billionaire has been advancing in the polls, especially since Friday when the FBI shocked everyone, saying it was diving once again  into Clinton’s email hell. Worse (for investors with weak bladders) both camps have hired a few thousand lawyers, girding for a post-election fight. In other words, this might not actually be over next Tuesday night. Bummer.

Unless the outcome is “clear”, Trump says he might not concede. If some key battleground states are lost in a narrow vote, then Clinton might not accept the results, either – without a recount and a legal challenge. In short, the weirdest, most divisive and unlikely election in our lifetimes has the potential to turn into a giant, post-coital mess.

The Vix is spiking as a result. That’s the so-called ‘fear index’ which presages big burps ahead for equity markets. It jumped about 20% on Tuesday to the highest level since the summer on fears of (a) President Trump or (b) no clear election result. Add in a 70% expectation the Fed will raise interest rates next month, and you have a strong recipe for stress.

Markets still think Clinton will win. And she should, based on a big early-vote turnout, the fact Trump has irritated a majority of voters and the peculiarities of the Electoral College system. But remember Brexit? All the financial smarty-pants thought that vote was in the bag and Britons would never be daft enough to toss a lucrative free trade pact. But they did. Stocks recoiled (briefly) and bonds spiked. Traders scrambled to cover their wrong bets in the days that followed, and are leery of repeating the mistake.

Hence, today’s triple-digit pasting on Wall Street. Safe to say some more may follow. Despite a jump in economic growth, good labour data, recovering corporate profits and a massive machine behind her, the status quo candidate looks weak. She could hardly get rid of that pesky commie Bernie Sanders. Now she’s being run down by a guy who would separate people by religion, build a wall on the border and talks about women like a 13-year-old from juvie.

Well, don’t stop gumming your cuticles yet. There’s more. Interest rates just went up.

It’s started with TD Bank, causing panic in the mortgage broker business Tuesday afternoon with a hike in its prime mortgage rate of 15 beeps, to 2.85%. This is a big deal. TD’s a major lender. It means millions of people with variable-rate mortgages will be paying more, effective November 1st (which is now). This also confirms fears that after Wild Bill brought in his mortgage mayhem rules on October the 3rd, big lenders would soon start passing on higher anticipated financing costs.

And, yes, this reflects a global bond selloff that’s been quietly taking place for weeks now, as yields rise and prices fall. Some sweet manufacturing data from China this week helped propel things along, easing fears about slow global growth and suggesting the bottom for rates is – or soon will be – in the rear view mirror. Expect to have this confirmed by the Fed four weeks from now.

By the way, this rate change at TD is the first in a year, and widely expected to set the standard for other banks. As one broker told an industry web site on Tuesday: “When a bank changes their ‘version’ of bank prime it also serves as an invitation for the other banks to join in and do the same. Naturally if they all change the public is screwed and all the banks make more profit.”

Meanwhile in Ottawa our finance minister was busy Tuesday afternoon announcing $81 billion in new federal spending (we don’t have) for transit, infrastructure and lots and lots of shovels. It was exactly the news the Bank of Canada has been praying for – fiscal stimulus coming from government largesse and taxpayer debt instead of monetary stimulus through another cut.

In short, Canadian rates won’t fall. TD proves they’re going up. So houses are going down. Hillary, too?

Don’t bet on it.

Be a man

POLICE modified

From time to time this blog strives to be a Public Service, and make you feel better about your spouse. Seriously. It could be worse. You could be Raymond the Henpecked Accountant:

“I have been a long time reader of your blog but today I am writing to you in desperation,” he says. Here’s the background: RHA is 40. She’s 37. Two kids destined for uni in a decade, and twenty years until retirement. He makes $110,000 and she pulls in $54,000, both with DB pensions, about $150,000 in liquid assets and a 905 house worth six large.

In short, they’re doing okay. Better than you, probably. Only $67,000 left on the mortgage, financial plan in place, budgets intact, flow chart taped to the fridge – the usual stuff that arouses accountants. But all is not happy.

“Now here is my biggest challenge – I am surrounded by friends and relatives who have all bought and upgraded their houses to more expensive ones. I am just very glad to have no debt, no mortgage starting next year. I have no desire whatsoever to upgrade and acquire a new mortgage. My wife is not too happy that every other house on the street seems to be more expensive than ours and that our house hasn’t appreciated much in value (paid $354K in 2005). My wife believes that house is the best investment and will always go up in value.

“We argue a lot about our house these days. She wants to sell and upgrade and I don’t. She thinks I am not very smart (financially) and loathes that every tom, dick and harry has a bigger and better house. They must all be very rich and we are so poor.

“I have budgeted that we can save at least $40K annually (and possibly more) and invest in a balanced diversified portfolio (TFSA, RESP, and non-Registered) without compromising our current life style once we are done with mortgage.  How can I talk some sense into my wife and talk her out of buying a more expensive house? How can I convince her now that we are doing so well financially, we shouldn’t make stupid mistakes?

“We have worked very hard to pay down our mortgage and I don’t want a stupid financial decision to ruin our future plans and savings. Please help!!!!!!”

Well, weeks like this probably don’t do much to help poor Ray make the case for a balanced, diversified portfolio versus the unmatched glam and sex appeal of suburban real estate, but this is really a battle of assets vs. debt. Already this couple have too much of their net worth invested in a single asset – about 80%. Ideally (according to my Rule of 90), that should be more like 50%, and then diminish steadily over the years until it hits 25% by retirement age.

Saving forty grand a year, as he plans, would get them there. But upgrading to something costing a million bucks would add at least four hundred thousand to the wrong side of the balance sheet, increase monthly costs and set them up for a kick in the groin going forward when 905 real estate meets its maker. And it will.

Given the sustained and accelerating weakness in the Canadian economy, how can anyone feel horny about upgrading from a fully paid-for house (on which a nice tax-free capital gain has been earned)? Oil is sub-40 and likely to stay that way for a while. We’ve had negative growth every month so far this year. Things are so flaccid the Bank of Canada had to cut interest rates twice this year – and it’s only August. Weakness and poor judgement in China have dropped commodity prices back to 1999 levels, creaming a country like ours which is so dependent on raw exports. And the contrast with the US is growing extreme, as their economy continues to motor ahead. The Fed, in fact, will be raising rates by the end of the year, while we ponder yet another hack. And did I mention there are socialists at the gate?

Ray’s house-lusty wife should ask herself how great real estate ownership is when in our most active market – Vancouver – over four in ten homeowners now have to rent out their basements, garages and spare bedrooms in order to make the mortgage. This week an insurance company survey revealed an astonishing 43% of houses have rented ‘suites’ – triple the national average, and twice that of Toronto.

So, if constantly upgrading your house, taking on more debt to climb the property ladder and reaping fat gains really works, why has it failed in YVR? Why would anyone spend so much money on a nice house, and then have to share it with grotty strangers? What’s the point? Why not just be a tenant yourself and enjoy the same great digs for a fraction of the cost?

Oh, right. Because your friends and relatives judge you by your address. Because all the other indebted people on the street look richer. This is the definition of fatuous, Ray. You poor, wretched sod.

When the reset comes, and it will, pity the folks with seven-figure homes in the burbs. Kinda like where Calgary’s going these days. While average prices have only started to decline, the top end of the market’s been hit much harder. Houses over a million have been unloved, discounted and often become structures of remorse for their owners. If anyone believes 905 or the outliers of 604 or 613 are any different, they’re dreaming.

So, RHA, print out all the hot MLS listings for your area, then slip a copy of this blog post into the pile. No matter how much she screams, make her read it. Then find new friends and tell your families to get lost. Put blockers on realtor.ca. Cruise around at night and quietly torch all the For Sale signs. Get a cable package which doesn’t carry HGTV or the dreaded ‘W’ network. Buy a giant dog to destroy your home and make it unsalable.

Or, you could say no. That should be fun.