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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

February 18, 2016 | The Bubble

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

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Almost two decades ago I started a company making TV shows for the networks. We had an investment show (of course), a dog show (natch), a real estate show (long before house porn was mainstream), a motorcycle show (my fav) and even a show for hormonal, dope-smoking, skateboard-terrorist youth (the ad guys loved it).

We built a fancy studio in a downtown building and eventually I sold a big hunk of the operation to a mutual fund. But not before trying out Internet TV and pioneering in streaming media, which was cool at the time. We bought a truck, put a studio inside, screwed cameras on the roof and went live, wireless.

Not two days after the first broadcast (there were actual news anchors in the truck) I found myself at lunch in the King Edward hotel being wined by executives from the country’s biggest telecommunications conglomerate. We love it, they said. Let’s talk deal. So we did. And my investment of a hundred grand or so in the truck, the gear, the staff and bandwidth suddenly looked like it was worth millions. Many of them. Hoya.

That was 1998. Nortel was dominating the TSX and within two years would peak at an astonishing $124 a share. Dot-com start-ups were the stuff of legend, with companies like pet.com, Webvan and eToys juicing investors who pushed valuations higher and higher for companies that were throbbing, promising, visionary, but profitless. Like my truck full of servers and anchorettes in eyeliner.

Well, we know how that ended. The big dot-com guys flamed out. The tech-heavy Nasdaq lost 80% of its value. Nortel was trading at 39 cents nine years later and my zillion-dollar deal evaporated once the TV execs sobered up.

NORTEL 1

The point is, all of us were bewitched by a bubble. As markets, asset values and adrenalin shot higher, so many forgot the fundamentals of how money is made and things properly evaluated. Momentum alone was not enough to sustain markets as prices detached from both the economy and common sense. Looking back now, the outcome seemed so obvious. But it escaped an entire society.

The dot-com days aren’t that unique. Regard China. Market reform there caused the Shanghai exchange to record a 53% gain in 2014, followed by a 54% surge last year. You know what happened next – a riveting collapse that tanked global markets late last summer and autumn. Why? Investors jumped on a speculative bandwagon, forgot the nature of risk and bought assets because they were going up, not because they were worth it. They weren’t.

“Investors fail consistently to anticipate the top of any rapidly accelerating market,” says my colleague and portfolio manager Doug Rowat. “This is because markets almost always overshoot their historical valuation ranges and momentum becomes a very difficult factor to build into forecasts. To assume you’re gifted enough to repeatedly time a bubble’s peak is fallacious and dangerous. You’re just as likely to sell too early and miss considerable upside or buy too late and suffer the declines.”

Of course, this brings us to Canadian real estate.

“The price of real estate on the west side is starting to look like the Shanghai Composite Index,” says Linda in Vancouver.  “With the bubble on the bubble. A friend sold a renovated knock down on Blenheim (busier street) for $2.1 million (33 by 110 foot lot, smaller than average) which was $350k over asking.

“The entire lower mainland has gone parabolic.   30% gain year on year, lots selling in Burnaby for $1.4 to $1.7 million. Honestly, don’t know what to think anymore other than leaving Vancouver would be more attractive.  I don’t want to go to Toronto either. It’s more and more impossible to attract talent here. If and when it does blow, OMG, what are people going to do then?”

Van, and steamy parts of the GTA, are in classic bubbles. Houses aren’t rising because they’re more valuable to replace, but due to unbridled societal speculation. Valuations aren’t increasing because wages and salaries have jumped, the local economy’s buzzing, mortgage rates are dropping or credit is expanding. Nor are offshore buyers, flipping realtors or assignment clauses to blame for propelling crap houses over the $1 million hurdle.

Just as dot-com stock far surpassed justifiable levels based solely on sex appeal and demand, so has residential real estate become riddled with risk, ripe for revenge. Real estate’s seen as the elixir for the masses, an always-winning lottery ticket and a riskless play. Children expect better houses than their parents ever had. Renters are told they’re morons. Moms turn into banks. The herd moves as one. When numbed, brainwashed posters come here to predict single-family Van houses will average $5 million in five years because, you know, they’re going up, it’s clear where this is headed. The wall.

When prices flatline and fall – whether it’s a terrifying descent or a sickening grind lower – equity will be peeled back to reveal the largest pile of debt in Canadian history.

Later, it will seem so obvious.

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February 18th, 2016

Posted In: The Greater Fool

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