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April 21, 2020 | No Good Choice

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.

The terrified, the prudent, the father-knows-best crowd want the economy to stay shut. Polls show most Canadians, scared and pliant, agree. But a vocal minority cry the vulnerable should be protected, the health care system bolstered and adults allowed to assess their own levels of risk. In other words, turn the thing back on.

Both views have been expressed here. The debate will intensify. Meanwhile it’s becoming clear just how pooched our population is.

We know six million people applied for government emergency income support – about a third of the entire workforce, unable to survive a single month without pay. And we know that as of two days ago, Ottawa had already shipped $20 billion out the door. Never happened before.

But evidence is emerging a huge number of homeowners are unable to carry their properties, living paycheque-to-paycheque, and now just kicking their debt Waterloo down the road. If the virus hangs around for, oh, six months, real estate is in serious trouble. Obviously a lot of people own properties they could not actually afford.

Check this out:

  • Over half (54%) of homeowners have asked their lenders for mortgage assistance, like payment deferral, according to a Forum Research poll. Says mortgage broker/blogger Rob McLister in response: “Given 60% of homeowners have mortgages, that’s the majority of people with mortgages. It’s hard to wrap one’s head around that high of a number given most people have jobs and fallback resources…But suffice it to say, a lot of people feel they’re in need of mortgage help.”
  • Six per cent of people have already missed a mortgage payment, while 14% of renters couldn’t pay their landlords. (Over half of all renters asked for relief.)
  • Somewhere between 600,000 and a million homeowners have requested, and received, six months of payment deferrals. This is costing the banks close to $1 billion in monthly cash flow, and all of that money is being added to the debt that families will have to finance.
  • One bank alone – CIBC – has approved 250,000 deferrals and payments on $20 billion worth of home loans, credit cards and LOCs. The woman in charge of banking operations is frank. She calls it “toxic.”

“We do have a highly indebted Canadian consumer that we’ve been talking about for quite some time, and just under half of Canadians live paycheck to paycheck,” said Laura Dottori-Attanasio. “If you add that people are no longer working and generating cash flow, I do think it makes for a toxic combination that’s going to be much more difficult to overcome the longer this takes to resolve.”

There is little doubt the combination of sudden, virus-inspired unemployment and irresponsible personal debt poses a structural risk to the Canadian economy. Add in oil – this week worth nothing, or close to it – plus the public’s reluctance to allow businesses and workplaces to re-open, and things darken more.

You cannot blame some schmuck with a house, two kids, a mortgage and no pension for losing his job to Covid-19, but you can hold him accountable for having no savings, resources or resistance plus a steamy pile of debt. All those warnings about 50% of people living within two hundred bucks a month of insolvency were apparently correct. When the inevitable shock came, they folded.

Now it’s all about timing. “The length of this crisis,” says the bank exec, “is going to be probably the most important determinant in terms of what things look like in the future.”

All true. And this is why leaders need to make choices. Quick ones.

Complicating it all is oil. What a disaster. Prices were negative Monday and barely positive Tuesday. What cost $50 just a hundred days ago is now changing hands for a few bucks. Cars are garaged and gas demand is down 35%. Air Canada just parked all is US-bound planes for a month. Porter hasn’t been flying for weeks. Factories are shut. The world is using a third less energy thanks to the virus, and there’s no place left to put all the oil.

So what?

This is deflationary. So is the virus. So is the fact hundreds of thousands have stopped making mortgage payments. Or buying houses. Or earning an income. Or spending money in stores. Canada’s GDP will crash 14% in the second quarter, says Capital Economics, compared to a -12% decline in the States. The bounce-back will be impressive when it comes – but with most Canadians wanting the lockdown to continue into autumn, the trauma will probably worsen.

Who survives deflation?

People with money, not debt. Oh boy.

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April 21st, 2020

Posted In: The Greater Fool

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