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August 8, 2019 | The Fog

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 Thursday he did it again. Trump tweeted that the Fed needs to cut interest rates (a week after the last cut) because the US dollar’s too high. It’s clear the American president won’t give it up until the central bank capitulates. So the race to the bottom continues.

If you were thinking about retiring and living off low-risk stuff like GICs, think again. Take a look at the latest chart for 5-year Government of Canada bond yields. It’s a ski hill.


More rate cuts in the States will throw gas on the economy, send stocks to further record highs and drop the US dollar. That will paper over the China trade war and pave the way to a 2020 re-election romp (he hopes). The Fed is expected to trim the cost of money again on September 18th. The market’s pricing in one or more chops after that by the end of the year. All-in, US rates will be a full 1% lower by the time of the general election.

So, what’s it mean for us?

When the US dollar falls, ours rises. We should be back to 76 cents soon. Some forecasters see eighty by Christmas. Mortgage rates have yet to bottom. It’s interesting that five-year variable-rate mortgages now cost more (at around 2.8%) than those with rates fixed for the term (2.6%), suggesting Mr.Market figures the Bank of Canada will have to follow the Fed at some point – perhaps early 2020. If this happens, the economy has stalled out.

Will we get negative interest rates with mortgages at 0% or the bank paying you to borrow?

Not a chance.

Meanwhile equity investors decided the big sell-off Monday was overdone and have been gobbling up stuff that went on sale. While a recession of some kind is in the cards in the next year or two, successful companies won’t stop making money. Trump will not stop being Trump. And it’s in the mutual interest of both Washington and Beijing to find common ground on trade rules. So while volatility is likely to shot higher, those who come here to tell you markets will lose half their value are just making it up.

Stay invested.

By the way, remember that when markets gyrate your portfolio asset weightings may well drift off target. Don’t rebalance too often (things change fast) but when you do, get it right. Do the opposite of what your pants tell you – harvest the winners and buy the losers to restore the plan. For example, unloading prefs now because of the rate decline is silly. You may realize an unnecessary capital loss while giving up a fat (and tax efficient) dividend stream. Expecting all assets in a diversified portfolio to increase at the same time is illogical. When central banks cut, preferreds suffer and bonds plump. When bankers hike, the opposite. Also recall this little rule: buy high. Sell low. Oh, wait a minute…

If events of the last few days tell us anything – from panic selling on Monday to panic buying Wednesday – it’s to ignore the short-term and focus on your own life goals. Buying a house. Financing kids. Surviving retirement. Making moves – buying, selling, freaking out – in a swirl of news is a really bad idea. You haven’t a clue what the next Trump tweet will say, or how the hardasses in China will respond. Next week is a fog, utterly unclear. Ten years from now – when you need the dough – is actually more predictable. You don’t worry what your house is worth until you come to sell it. Same with the investment portfolio. Set it. Forget it. Tune it up once or twice a year. Ignore this crap.

And speaking of crap, here’s CMHC.

This week the federal agency mandated with Screwing up the Housing Market and Fomenting Inter-generational Warfare was responsible for this media story:

A growing cohort of rich, aging baby boomers will contribute to even tighter housing supply for younger generations in Toronto over the next decade, according to a new report. Seniors have traditionally downsized or switched to rentals and retirement homes, which has freed up supply for younger homeowners. Rising employment and income among older generations along with growing social-support services has turned that trend on its head, the Canada Mortgage & Housing Corp. said in a report Thursday.

“Rising home-ownership rate among seniors may continue, which will translate into less supply being freed up for younger generations,” the country’s housing agency said. A quarter of homes in Toronto were owned by seniors age 65 and over in 2016, up 4.5 percentage points from 2006, the CMHC said. The share of townhouses owned by seniors reached 17 per cent from 12 per cent over the same period.

So, wrinklies make up 16% of the region’s population but own 25% of the houses? The shock here is that the proportion’s not higher. After all, the older people get the more they earn and accumulate. Net worth is the highest among people in retirement. Duh. Meanwhile the run-up in real estate over the past decade obviously favoured those who already owned – which at that point were Boomers in their 50s. And this is a surprise? An injustice?

Anyway, in this case the past does not dictate the future.

Boomers may be house-rich, but the evidence is overwhelming they’re also asset-poor – thin in assets that can become an income stream. Seven in ten lack corporate pensions, and millions are just discovering it’s impossible to live on the government CPP/OAS pogey.

The real estate reset is still coming. Patience.

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August 8th, 2019

Posted In: The Greater Fool

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