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February 28, 2017 | Gravity

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.

Young Dorothy and I built our first house decades ago. On the cheap. So much alum siding it looked like a giant can of tuna. But it was home. And we could come up with the mandatory 10% down payment – ten grand. Of course, the mortgage rate was 12.5%. And then, three years later, we had to sell and chase better jobs. Lost money. Real estate had fallen. The mortgage break fee alone was excruciating. There was a recession at the time and getting out was a narrow escape. “Well,” I remember saying to her when it was all done, “that sucked.”

Lately money’s been cheap and houses dear. In fact, Canada has a real estate bubble – at least in a couple of cities – that’s made headlines around the world. No generation prior has paid so much for a home nor been willing to shoulder so much debt. Never before in history has the cost of a house detached so seriously from what people actually earn. Never have we seen young people so hungrily make up the difference with borrowed money.

Apparently it’s about to get worse. Think of Isaac Newton. More on that dude in a minute.

Many blog dogs felt pooched yesterday by a new survey from HSBC on our needy Millennials. The kids are lining up to step off the cliff. Among the two-thirds who don’t presently own real estate, a staggering 82% indicate they intend to buy within the next five years – yes, salivating to grab assets that have never cost more. But 73% of these same people admit they’ve saved nothing and have no plan. That’s where Mom comes in.

Close to 40% of the owner-kids say they bought thanks to a withdrawal from the Bank of Mom, with half of them having to ask for more to cover unexpected costs. Oops. But why are the Mills so house lusty? First, their parents facilitate and encourage this behaviour, because real estate worked for them. Second, houses always go up (see the underwhelming blog post on recency bias yesterday). Third, financial illiteracy is rampant and most moisters wouldn’t know an ETF from an STD. Fourth, peer pressure. When everybody’s doing something, everybody wants in. The herd speaks with a single voice.

So, on to Newton. Trust me. It’s relevant.

In 1711, shortly before most Boomers were born, the South Sea Company was created and given a monopoly on trade with Spanish colonies in South America by the British government, in return for absorbing that country’s war debt. Cool deal, it seemed. Innovative. Investors loved it and bought in.

By 1720 the shares were £128 when evil insiders circulated false claims about revenues. That drove the stock to £175 and attracted a lot of new investors into this sexy play, including Sir Isaac Newton, the gravity-discovering guy and primo scientist of his day. Great move. Within months Newton had doubled his money with the price rising to more than £330. Like the supremely wise person he was, Newton decided to get out, pocket his profits and move on.

However, like a slanted semi in Leslieville or a Vancouver Special, this puppy continued to rise in value as more and more greater fools piled in and made huge returns. In fact, by the summer of 1720 shares had surged to £1,050. Newton’s buds were rolling in it. So, envious, back he went – buying into the venture at a level thrice that at which he’d sold – just a matter of weeks before the peak. By that autumn the bubble had burst – since pure speculation, recency bias and greed were behind it. Shares crashed to £175. Newton lost twenty thousand pounds – the equivalent of more than $3,000,000 – and exited the investment broke. His journey had been comprised of four stops: greed and satisfaction, followed by envy and despair.

Okay, so that was 300 years ago, and you don’t care? Well, the same happened with Toronto property in 1989. Dot-com and tech stocks in 2000. Gold in 2011. Vancouver in 2015. Houses in Markham, 2017. Whenever assets erupt in value, driven not by fundamentals but by emotion (and especially when supported by debt), it does not end well. The last in are the first to be squished. Those who don’t take windfall profits risk lasting regret. Fools who trade up in a rising market become greater fools. And parents pushing kids into real estate they have not earned and debt they don’t deserve do them no favour.

Stuart is a seasoned, experienced, big shot portfolio manager with one of the bank-owned wealth management outfits. It was he who this week reminded me of Newton’s putz.

“Time will tell,” he says, “but I couldn’t help but ponder the potential similarities that may occur with our Vancouver (and Toronto) real estate valuations; psychology and end points.  I think that guys like you and me see these things in a different manner because we deal with “bubbles” in many forms on a constant basis.

“I have noticed that most often I am too early on the sell side because of the self-fulfilling destiny of capital flows from the herd,  that drive simple overvaluation to absurdity.  Michael Burry of course was 100% right in shorting the CDS’s but was “early”  as valuations went from stupid to “full retard” (sorry, not pc)…eventually he was vindicated.  Anyway, the day will come…and as you have pointed out I suspect it’s begun already out here.

“As Buffett says ‘What the wise do in the beginning, fools do in the end’…..I also like ‘The decline in any bubble will be equal and opposite to the delusion which preceded it.’”

Be careful what you covet. It’s a long way down.

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February 28th, 2017

Posted In: The Greater Fool

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