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June 6, 2016 | The Funk

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.

On Friday this brave, quixotic little blog commented on the latest US jobs report, daring to point out that things ain’t so bad with the unemployment rate falling and wages rising. Well, if you read the comments section which followed, you know this site managed to attract a boatload of hairshirted, nihilistic doomers & bullion-lickers who think the United States of Trump is an evil empire about to turn life as we know it into a smoky pile of toxic, indebted rubble.

While this won’t happen, there certainly are some things to worry about, besides your weight, sex life, nebulous pension and whatever that was your dog ate in the park last night.

Like Brexit. A month ago this was a yawner, with analysts everywhere convinced Britons would vote on June 23rd to stay in the European Union, just like boss David Cameron instructed. But it turns out UK locals are in a mood – just like Trump and Sanders-loving US locals – and whatever the Establishment tells them to do is opposite to what they will.

So the pound took another heave-ho Monday after not one, but three, new opinion polls showed the “Leave” side is trouncing the “Remain” forces by about five points. Most worrisome, the gap has been consistently growing in recent days, and there’s still two weeks to go.

If this holds, the UK currency will fall steadily until the vote, tumble more on the results, and lead to some serious volatility on European and global markets. Will this send Europe back to the Middle Ages, and nullify all those expensive efforts by the central bank there to battle deflation? Beats me. But it’s doubtful. Expect a new treaty, and a big buying opportunity.

Next thing to worry about is closer to home. Dig this chart:


It shows the direct contribution of real estate development to the national economy. It’s at an historic high, as you can see – approaching 8% of GDP. When you add in the extra activity generated by resales – like realtor commissions and marketing, insurance and mortgage financing – the share of the economy jumps above 13%. In comparison, all of our manufacturing (including cars) equals 10.5%, while the energy, oil and mining industries combined come to a mere 8%.

Macquarie Research, which compiled the chart, says, “Residential investments as a percentage of GDP are at an all-time high. While the broader economy attempts to stabilize, residential construction has been accelerating and is now at a peak… Given the cyclical nature f this sector, the risk is tilted towards slower construction spending in the upcoming years.” And let’s remember that the US economy tanked with less RE exposure.

Just one more log on the fire, after two major bank CEOs have started lobbying for higher down payments and a BC credit union is questioning tax-free capital gains on houses. When this mother pops, it won’t be quietly.

Now, how about the slowing American economy? And Trump?

The May job-creation numbers (38,000) sucked, and data for the previously two months was revised lower. The bond market immediately dropped yields ten bips, suggesting the great American recovery is shedding momentum and interest rate increases will be shelved. For sure, a June hike is off that table, thanks to the latest data and the Brexit thing. But don’t be so sure the Fed is packing it in. “I continue to think that the federal funds rate will probably need to rise gradually over time,” said boss Janet Yellen on Monday, “to ensure price stability and maximum sustainable employment in the longer run.”

What do we make of this? Two things. After creating three million jobs in the past two years, the US is not stalling out and a month or two of crappy data might end up meaning nothing. But it comes at a bad time, when the race for the White House is between a baggage-laden career political operative and a populist billionaire lunatic.

Trump can’t win. But the journey from now to November could be wild on the markets. In fact, this summer – complete with the UK vote, American data angst and a rumoured move by Ottawa to drop the hammer on housing – could see some classic roller-coastering. The best defence is a diversified portfolio, with broad exposure to global markets, not too much maple and assets that are not correlated to the equity markets. That includes real estate investment trusts, plus inflation-loving real return bonds and bargain-priced preferreds.

Most of all, don’t invest for the moment. Or let some insecure, anonymous blowhard on a dodgy, heretical blog run by a bearded guy scare you into selling perfectly good assets when they temporarily decline. By the same token, don’t fall for the siren some of the house-pumpers who tell you real estate is benign and will rise without end. While a house in Ottawa or Kamloops may not represent a big risk right now, one in Richmond Hill, or Richmond, surely does.

Doomers have a role to play. Like proctologists. But keep your distance.

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June 6th, 2016

Posted In: The Greater Fool

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