December 31, 2018 | Expectations

Predictions are so 2016. When the world’s rocked by a single tweet and relevance is measured in clicks, nobody knows what’s coming. So why pretend? So let’s just focus on what’s reasonable to expect.

More volatility, not more losses.
The Vix spiked at the end of 2018 in a prelude of what could lie ahead, starting next week. We’ve seen more 2% and 3%-per-day moves than when Bill Joel had hair (and wasn’t fat). In fact, just a few days ago the Dow moved a thousand points for the first time in a single session. Combine high-frequency trading with wonky politics, record profits and record debt, central bank tightening plus an aging population shoveling money into financial assets and you get moments like that. More are coming. But ignore them. It’s noise. Day-trading stuff. Not for us.

But markets may hit fresh highs.
Think rationally, not emotionally. The greatest economy on earth is growing at more than 3%. Unemployment’s at a half-century low. Inflation is pffft. Rates are still reasonable. There are more jobs available than people to fill them. Corporate profits have been at double-digit levels. Technology is changing the world and goosing productivity. There is no recession on the horizon (although one will eventually come). It’s year 3 of a presidential cycle, so is the guy going to mess up the markets? And, yes, a trade deal with China is in the cards. There’ll be new highs hit. Whether they hold or not is unknown. But if you have a properly-weighted and balanced portfolio, sell nothing.

Rates are going up. Gently.
Yeah, things are more dovish after the market mayhem and Trump tweetstorm of the last six weeks. But even withering presidential scorn did not stop Fed boss Jay Powell from doing the right thing before Christmas and raising the benchmark rate. The bank’s job is to keep the economy going and employment plump but at the same time prevent a wage-price spiral. So far, so good. Count on two rate hikes instead of four in 2019, but it could more. It won’t be less. And definitely no cut. Not here, either – unless the wheels come off.

Mortgages on sale soon.
At 2018 ended, bond yields plunged. Massively. Unexpectedly. Decisively. Government of Canada five-year debt toppled from almost 2.5% to the 1.9% range. Normally this would result in a nice drop in fixed-rate mortgage costs. But not yet. It’s coming. The banks have seen their mortgage originations dry up and blow away thanks to the stress test, while low home loan rates and teensy spreads mean they make less money. That hurts, which has been reflected in the price of bank stocks (and banker bonuses). But with borrowers still straining, real estate markets wobbly and the all-important (competitive) spring market now just six weeks away, change is in the air. So take advantage of it. And borrow long.

Trump is toast.
Despite his legions of foamy followers, the guy’s rabidly loyal base has no growth. Over the course of two years the most unpredictable and iconoclastic president of our times has gone through cabinet ministers like facial tissue, increased business costs (with tariffs) as much as he lowered taxes, pissed off traditional allies and mocked anyone who worries about environmental, social or human rights issues. Walls, tariff barriers and jingoistic nationalism are 19th Century relics he has resurrected, and in so doing torn America – a progressive country – in half. The Republican Party is not the Trump Party. Even if Mueller ends up with nothing on the president, it’s virtually impossible for him to be the next nominee. 2019 will make this obvious. Markets will ultimately lap it up.

So long, Rachel.
Premier Kenney by a wide margin in May. Big alliance with Doug Ford. Trudeau will hate it.

More real estate diddling.
Housing markets have a profound weakness as the stress test has reduced credit by a fifth, prices have not dropped enough to stimulate demand and rents are rising as a consequence. It’s a mess. Government diddling has only made things worse, as the latest RBC affordability study showed. Nowhere have government policies backfired more than in Vancouver and those areas of BC where the new anti-real estate tax has been levied. Houses nobody can afford now cost less. Homes people could possibly afford now cost more. Offshore and out-of-province investment has withered. Sales are plunging. Everyone is paying a price for electing people with moronic ideas. And now, more. 2019 will likely see the stress test capped, and 30-year ams reinstated. Realtors will scream ‘buy.’ The hard landing draws inevitably closer.

Vote Max, get Justin.
In 2019’s federal election Canadians are about to get a lesson in Math. The Libs have screwed up federal finances, run a deficit every year, swelled the debt and presided over a real estate debacle while focusing on gender politics. Lots of people dislike that and crave a fiscally responsible alternative. But along comes Max Bernier, Canada’s wannabe Trump, with a new right-wing party, channeling Preston Manning’s Reform. Of course every ballot cast for the People’s Party is one less for the Conservatives. So, vote Max and get Justin. Mean the NDP’s giant mistake – Jagmeet – pretty much guarantees the far-left vote will collapse. And those folks are not going for Andrew Scheer. Math. Only so many votes. Split them, and the man that two-thirds of people don’t support becomes the PM. Again.

HNY.

Garth Turner December 31st, 2018

Posted In: The Greater Fool

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