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November 14, 2016 | Not Boring

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.

Tuesday marks seven days after the earth moved.

Here is what’s changed since 3 am on the 9th.

  • The probability US interest rates (then ours) will be rising, starting on December 14 is now 92%. The odds were about 80% last week, and in the seventies the week before. Stick a fork in uncertainty. It’s done. And you know what this means for Canadian real estate values, right?
  • Estimates are the Fed will hike again twice in 2017. Maybe three times. In a year, Pacific Investment Management estimates, the prime will be 1% higher. Mortgages, too.
  • The bond market’s having a cow. Over $1.2 trillion has been erased in a week. Almost all of it migrated into stocks.
  • Yields are coursing higher. The return on US Treasuries has bumped almost 50 basis points in a week. That’s massive. (Prices topple as rates plump.)
  • Emerging markets are cratering on the expectation Trumpian times will be protectionist ones. Borders, walls, tariffs, less free trade. More testo, less compromise. America first, baby.
  • The US dollar is surging, so ours is cringing. Solidly below 74 cents now. Gold’s also being whacked on the expectation of more inflation and higher rates.
  • But other commodities, like copper, are galloping higher on the Trump pledge to spend $500 billion building stuff.
  • Money is gushing into equities. The most in four months. Markets are spiking to new record highs.

So here’s the question: can it last? Is this a kneejerk reaction to an unexpected event? What does it mean for a balanced portfolio. For your money? Your house?

Yes, it’s an extreme reaction and what’s happened in the past week will probably be tempered, moderated or reversed a little. Markets, investors and most of the planet’s inhabitants expected another outcome on the 8th, so when the weird guy won there was a supersized reaction in one direction (down), then an equally big reversal. And while little doubt exists that Trump will be the Inflation President, running up the deficit, spending outlandishly, cutting taxes and pursuing protectionism, economic growth ain’t about to surge in a month. Or six. Or even a year.

So, stocks are probably outrunning their game. Be careful about increasing exposure at the moment. Bonds, however, will have an immediate impact on daily life. As yields pop higher you can expect mortgage rates in Canada have seen their lows for a long time. Like the rest of your life. Combined with the Oct. 3 mortgage changes and the coming CMHC risk-sharing with lenders, there’ll be a damaging impact on housing.

The Bank of Canada need not react until well into 2017, and still the cost of both variable and fixed-rate homes loans will rise. If you need to borrow now, go long. Meanwhile, if you’ve been thinking about selling your house in the spring to finance retirement or get out from under debt, well, do it now. Could be a cruel April.

As for portfolios, do not surrender your balanced positions. Stay underweight in Canadian growth assets, and overweight in the US and international. Oil is still being creamed by oversupply. Emerging markets are being trounced as the greenback inflates and trade fears mount, so if you don’t have any in your portfolio, consider this a buying opportunity. (Seriously, everybody needs to own some China.)

Preferreds love rising rates, and will likely deliver higher capital values along with a juicy, tax-deferred yield. REITs, not so much. More rate-sensitive, they might under perform, but are certainly worth hanging on to for distributions and diversification. Ditto for government bonds, which will fall in price but continue to temper volatility. The portfolio I’ve oft recommended here has only a small sovereign bond weighting (and keep durations short). But the corporate bonds, high-yield and real return – which rise with inflation – are cool. Stay the course.

Summary: I hope you took my advice in July and crystallized your Vancouver real estate profits. Seriously. The rest of you, stay balanced. The last thing you should expect now is boring.

$    $    $

Make up your mind, already…

The real estate market might function in a quasi-predictable fashion – shaped by, you know, supply and demand – if it were not for government thrusting its sticky proboscis into every orifice. Just weeks after the feds moved to massively curtail demand by first-time buyers who can’t actually afford the houses they’ve been buying, Ontario brings in yet another subsidy to encourage the moisters’ horniness.

This one comes via a doubling in the exemption to provincial land transfer tax. It means the kids can score a $386,000 property and pay nada to register it. The flip side is an extra tax is now being slapped on people buying properties worth more than $2 million. By the way, in Toronto (where most two-bagger houses are) the LTT is currently $72,200. In Cape Breton, that buys you this.

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November 14th, 2016

Posted In: The Greater Fool

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