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April 24, 2020 | Can’t Wait

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.

Normal is gone. At least until the autumn. Then you can get a haircut, jog through the park, grab a beer, see the dentist, buy shoes, pick a new iPhone, or (like me) visit the gym for a four-hour workout to tone up your glistening abs.

But some things will be odd for a long time. No Raptors or Flames games to watch in person. No Stampede or CNE. No Drake or Adele concerts (there is a God…). No packed airports plus emptied hotels and economic mayhem in places that depend on visitors or foreigners. (Tourism added $90 billion to the economy last year and employed 1.7 million people. Yikes.)

Real estate? Forever altered. No more open houses. Wary sellers. Predatory buyers. Thousands of realtors leaving the industry. Virtual appraisals. Less, tighter credit. Falling values in most places. Condo slaughter in others. (We’ve allowed real estate to become 24% of Canada’s entire economy. Ouch.)

As for government, the virus has also bent the future. Every day that T2 walks to a podium and pledges more billions (this week Ottawa announced it’s paying students not to work, and footing the bill for businesses that can’t honour leases – instead of letting them open and pay their own rent), things darken. The deficit will soar to $200 billion and beyond. It will expand the national debt by a third, adding a huge interest burden to federal finances. In turn, more taxes – on an economy with less activity.

So yesterday we mused about what this might mean. Deflation, this learned blog suggested, could be one outcome. The bond market is tilting that way. Lower prices, lower wages, less employment, business contraction (it’s now estimated 50% of all indie restaurants will never reopen), low rates, low growth, structural unemployment and a government desperate for tax revenue to keep the pogey spigot open, now that millions are supping.

Deflation is bad for real estate. Worse for debtors. Great for buyers with cash. Good for investors with liquid assets and cash flow. And, yes, it widens the wealth gap – since Canadian households have never been this indebted, and legions of them would struggle if deflation arrived. Incomes would fall along with the value of their one, big asset. So much for the strategy of selling a house to fund retirement.

But, wait.

Some people fear the opposite – a world of economic insanity in which government spends wildly, trying to inflate problems away, borrowing with abandon, destroying the value of the currency and creating a hyper-inflation to save real estate and wash away crippling debt. In this world cash is trash. Real assets rock.

And this brings us to Mike’s problem. His wife. And the above.

Garth, I’ve been following you since your time in Ottawa. Strange times. My wife and I are both physician (I’m front line) so took only a small Covid-related income  hit.

What keeps me up at night? We just completed the sale of our Vancouver home and are currently renting a beautiful estate home. We pay barely over twice the property taxes in rent. Dirt cheap. Luxury rentals have plummeted in the last couple of years. So while we have some diversified investments, we now sit on almost 2mil cash In part because of the house proceeds.

She grew up in Romania and lived through the 1989-90 hyperinflation there. She thinks our cash will inflate away in no time. While she loves our rental, she would like to get back into the housing market ASAP for fear of inflation. Problem is we can’t afford the house she wants because I don’t want a mortgage. I’m 45. I’m done with debt.

Am I being foolish here? How long would the deflationary period last before we get rapid inflation?  We’ll be in partial lockdown for many months to come. I don’t see business as usually for a while. Curious to get your thoughts in the timing of deflation/ inflation.

Well, Mike, she’s wrong. There’s no hyper-inflation in the cards – not with most businesses shut, seven million on the dole, corporate earnings whacked, oil prices in the ditch, planes not flying, empty highways and a long, dry stretch ahead before government even lets people feel normal. Our GDP is in freefall, exports have tumbled, hotels are closed and the border shut – and the pandemic has been with us for barely five weeks. Just imagine where we’ll be in a few months. Deflation may not come. But we are far closer to that end of the OMG scale.

Buy a Van house now?

Analyst Dane Eitel thinks you’re nuts. “Prices will be coming off with gusto in the upcoming months,” he says. “We anticipate the market to correct a total of 23% from the peak and down 16% from the latest data point. The ugly truth is the possibility of the market going even lower is tangible. An additional 28% decline from here is possoible.” Eitel says he fully expects detached prices to be $500,000 less than they are now. Seems deflationary to me.

So, Dr. Mike, buying a honking big doctor-appropriate house at this point would be a bad move. Stick with the rental, and let the current owner lick his wounds as equity slides. As for the two million, why would you not use the cash to invest in financial assets which have been beaten down? The ride back up over the next couple of years as the economy slowly re-opens will be fun (if volatile), and since most docs don’t have pensions and work through professional corporations, it’s important for you and that inflationary squeeze of yours to have significant personal assets. Rest assured Mr. Trudeau will be gunning for your PC again soon.

Will inflation ever return?

Sure it will. But this is not Romania. Here we just nibble and lick you to death.

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April 24th, 2020

Posted In: The Greater Fool

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