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September 16, 2019 | Duck!

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.

First the attack of dunces, then the drones.

Kicking off the election contest, T2 announced that people without money should be able to buy $800,000 houses and taxpayers oughta handle a hunk of the mortgage for them. Then Don’t-call-me-Stephen Scheer announced a universal tax cut in a country where 40% of families already pay no net tax.

Based on the party’s calculations, the average single taxpayer would save about $444 a year. A two-income couple earning an average salary would save about $850 a year. “We’re going to deliver a tax cut targeted specifically at taxpayers in the lowest-income tax bracket. This means that every Canadian will see their income taxes go down and those in the lowest tax bracket see the biggest benefit of all,” Scheer said at a campaign stop in Surrey, B.C. “This means more money to pay the bills, to save up for your kids’ education or maybe even finally afford a family vacation,” he said.

Then Trudeau said the government would give thousands of people without business experience $50,000 each to start businesses. That should work out well. And soon the Cons will announce their plan to blunt the stress test and “make homes more affordable.” The vote-buying is remarkable, and comes after four years of fat deficits, largely due to the billions being given now to people who procreate.

Of course voters vote in their naked self-interest rather than the national good, so this blog will try to shut up and behave itself. However the latest housing numbers and economist comments this week underscore the idiocy of the Lib and Con real estate pumping. With mortgage rates in the ditch, how can any of this be good?

You can almost hear BMO’s Bob Kavcic smirk a little as he says. “Yet again, the housing bears are going to have to take their medicine. A solid job market and population flows persist across much of the country, amplified by a roughly 1% drop in five-year fixed mortgage rates since late-2018. This momentum should continue into the fall.”

The bank (it lends mortgages) looked at the latest numbers and concludes the recent rate plunge has changed everything. The sales-to-new listings ratio has recovered for the first time since the stress test was created. Months-of-inventory has dropped sharply. Prices are stable . Van sales are up by half since April. Toronto prices have reclaimed their 2017 peak. Ottawa and Montreal are hot with 80% of NCC listings absorbed in a month. Halifax is solid as newcomers flood in.

In short, says BeeMo, 2.5% five-year mortgages are like crack cocaine to the homeless moisters. Or should that be  a Puffco Plus +V2 Wax/Oil vape pen?

In any case, all that a shared-equity mortgage, gutted stress test or 30-year amortizations will do is fuel the sale/price fire, swell the cost of the most affordable real estate and kick up debt. The day of reckoning is probably delayed. And worse.

Now to the drones.

As you know, some irascible Iranians arranged an attack on Saudi oil facilities, scuttling up to half that country’s production and 5% of global supplies. As a result oil prices surged 10% in a day (the most ever) and suddenly people were talking about $100-per-barrel crude again.

Battered energy stocks leapt higher, US markets fell (a big spike in gas prices hurts the economy), the loonie popped and a lot of money once again flowed into bonds, driving yields lower and prices higher. So, volatility. Instant change.

The point worth noting is that the drone attack was unknown, unexpected and weird. Like Nine Eleven or the latest Trump Tweet, this is something that can instantly impact stock exchanges, bond markets and investor psychology. There’s no way DIY investors with eight or ten fav stocks and twenty minutes a week to devote to their retirement nestegg can prepare for this stuff, or react in time to prevent an impact.

So the drones should remind you of our simple rules of portfolio management:

  • Never exit an asset class.
  • Do not own individual equities unless you have a bundle and like volatility.
  • Set weightings for various assets and stick to them. When they fall out of whack, rebalance.
  • Eschew mutual funds. Crazy fees.
  • Sell the winners and buy the losers to regain that balance. That includes preferreds.
  • Keep a quarter of your portfolio in US$-denominated stuff.
  • Own the right amount of bonds for the right reason – which isn’t to collect interest
  • Be balanced and diversified since you never know what’s coming.
  • Stop watching BNN. They don’t know, either.

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September 16th, 2019

Posted In: The Greater Fool

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