September 24, 2020 | They Did What?

Was the bond market surprised when Mr. Socks let it be known federal spending was just getting going? That the estimated $380-billion annual deficit was, well, merely a starting point?

Nah. Rock-bottom yields hardly budged on Canada bonds after the Throne Speech. Mr. Market says the central bank will continue to gobble up debt, creating demand and depressing yields for a while yet. Given the one-two punch of fiscal and monetary stimulus (Chrystia’s spending and the CB’s buying) we’re on our way to a $500 billion annual shortfall, and all the long-term consequences that will bring.

Don’t ask. They’re ugly. Your kids will hate you. Especially if they grow up to be anaesthesiologists.

Meanwhile, lenders are in a deathly battle for mortgage market share. Today we have a new all-time winner for the lowest fixed-rate, five-year home loan. It’s from those pirates at HSBC and clocks in at a mere 1.64% (for insured mortgages). It’s the cheapest advertised rate in Canadian history.

Yikes. That means it costs but $2,031 to carry a mortgage of $500,000 which, after five years becomes $415,600. Thus, $84,400 in principal is retired through making $122,000 in payments over sixty months. A record.

Combine that with 20x leverage, thanks to CMHC’s ridiculous insuring of 95% mortgages, and you arrive at these conclusions:

1. When housing agency boss Evan Siddall warns young people not to buy real estate because of the inherent risk, and chastises society for its mindless ‘glorification’ of housing, is he hoping we won’t notice what his own outfit is doing? By insuring loans with extreme leverage, protecting lenders who can then do crazy things – like offer a 1.64% loan – this governmental body is literally begging moisters to jump in, increasing demand and jacking prices further.
2. Ottawa is out of control. Stimulus spending is off the charts. Now the PM says, in a trumped-up, pre-election address to the nation, we’re in a second virus wave. Not maybe. It’s here. (By the way, the province I’m in today has one lonely dude with symptoms. No new cases. Nobody in hospital.) As a result of scary Covid, we’ll get national child care, universal pharmacare, payroll subsidies until next summer, a brand new CERB,  and, oh yeah, an enhanced shared-equity mortgage program for first-time buyers. Plus, of course, whatever the NDP wants in order to prop up the government. Did I mention there’s an election in the cards here? Will Canadians vote against cheap child care, 1% mortgages and free scripts?
3. We are so drugged on debt. Households owe over $2 trillion, and mortgage demand is (of course) popping higher. The feds will spend $500 billion more than they have, pushing the federal debt way past a trillion. Provinces are pooched. Cities are crying for cash (look at poor Toronto and Vancouver). Conclusions: taxes and user fees will rise. When rates start sneaking back up, well, I hope you did the right thing in the final months of 2020.

First, if you’ve been even thinking a teensy bit about downsizing your real estate, and live in a bubble city or region (everywhere except Alberta, and the other flat bits), why not do it now? Buyers are currently hopped-up, wild-eyed, debt-infused zealots, seriously believing if they don’t purchase immediately they’ll be shut out forever. So cute. Anyway, this is the time to bail for top bucks.

Then rent for a while. Wait to get back in if you need property. The world will sure look different in two or three years when all of this stimulus starts turning to regret.

Looking to buy? Don’t. Utter foolishness. You’ll pay too much and are better off leasing a place since landlords are hurting and rental rates are dropping. Down 15% in the last few months in Toronto, for example.

If you must buy (spousal abuse) pre-qualify for financing. Get a five-year fixed commitment since the variable discount has largely vanished. If you end up in a bidding war, and win, (a) plan on staying put for at least a decade to justify being Hoovered, and (b) get a weekly-pay mortgage which – combined with today’s ridiculous rates – will help you trash the extra debt in record time.

Have a financial portfolio? Stay invested. The amount of government and central bank stimulus in Canada, the US and globally is unprecedented. Twelve trillion so far – which is about the size of the entre Chinese economy. It will continue to inflate many asset values, keep rates depressed, flow cash into capital markets, paper over anything Covid does and shift the burden of pain from corporations to governments, taxpayers and savers.

There’s a reason equity markets caught fire after their March lows. That’s when Trudeau and others turned the taps on. Despite all that the virus has done to our world, investors with balanced and diversified portfolios have skated through the mess. Now the taps are being opened even wider. No reason to think we’ll get a different result. And when a vaccine arrives, stand back.

By the way, did you see Ontario is now allowing employers  (effective next week) to skip making contributions to their defined-benefit pension plans? More virus fallout. More reason you need a Plan B.

Garth Turner September 24th, 2020

Posted In: The Greater Fool

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