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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

April 20, 2020 | Wusses?

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.

It’s hard to imagine anything losing 40% of its value overnight. But that happened to oil. What a mess. And while that was sending Alberta’s premier into a raging Tweetstorm, people in NS were trying to understand a mass murder. On top of a pandemic.

These are not easy times. I thought about that as the SAVD (Self-Anointed Virus Cop) who lives beside the park yelled at me again when I walked Bandit along the edge of a deserted field. ‘Go home,’ he screamed. ‘And stay there.’ I ignored him. Bandit, too. He’s deaf now. We walked on.

Did you see the poll today?

While angry protests against lockdowns, quarantines and empty businesses erupt in the US, Canadians are reacting in a far different way. Is it our cautious nature? Or all the new money Ottawa is sending households? Look what the Angus Reid survey found: close to 80% say it’s too early to open stores or workplaces. Almost a third believe we should stay locked at home until sometime between July and October. And even if restrictions were officially lifted, most would choose to continue self-isolation. At home, in their yards. Yelling at guys walking dogs.

Source: Angus Reid

Our political leaders and the media did a fine job of scaring the crap out of us. Polls found that by two weeks ago 70% of adults believed they’d get the virus and 60% felt their symptoms could be severe. So far 0.094% of Canadians have tested positive and of those 4.5% died. Most have been the aged, with about half being nursing home patients. Globally 96% of folks who get the bug experience mild symptoms. But the fear of death has apparently reached 100%, so the economic consequences may be more profound than we all suspected.

The virus has shackled economic activity, crushing the demand for energy and leading to oil prices that hit $10 US, then went into free fall – to less than zero for futures on Monday (crude was over $50 a few months ago). Negative oil. Astonishing. It’s ugly for Canada, where the black stuff remains our biggest export. No wonder Jason’s head is imploding. But an even bigger component of the economy now is residential real estate, and that’s where Monday’s poll really bites. The oil-house combo suggests Canadian economic recovery could be a lot slower than that of the States, where authorities (and citizens) seem more willing to let the virus spread through the herd. That may be logical. It may be suicidal. Time will tell.

What do these things mean for investors?

Social pressure’s likely to keep Canada shuttered until well into the summer. Maybe longer. The odds of a pile of small businesses not opening again – despite Ottawa’s payroll subsidy and zero-interest, partly-free loans – are 100%. If the restaurants and bars do swing open, customers may be too chicken to flock back. Theatres, concerts and sporting events are toast. This will be a year without vacations, condemning Airbnbs, festivals, hotels, tourist destinations and artists. The cruise business is kaput, which hurts both coasts. Airlines will stagger back, but the restoration of lost routes will depend on demand – which is based on public confidence (and as of today everybody must wear those damn masks).

In short, in an economy where two-thirds of all GDP is dependent on consumer spending, what people believe, matters. So when 77% says, ‘keep ‘er shut’ you have an idea of what to expect.

Given this fear – valid or not – how do you invest?

First, look at this gauge of consumer confidence in Canada. Yikes,

Source: Nanos Research, Bloomberg

When so many are fearful, the world brims with opportunity. That should go without stating. But people too afraid to go out of their houses to earn a living are unlikely to be astute investors. Hence anyone looking to buy a house from a virus-motivated vendor will probably do well. People on the market now are highly motivated. Capital Economics said Monday houses prices in general will fall 5% during the pandemic. That’s probably light – but still means $75,000 off the average Toronto pile.

In terms of a financial portfolio, look at the beaten-down energy sector. Amazing. Given the economic contraction in China and the big hole coming in US GDP (maybe 30-40%), demand has crashed. The oil supply depots are full. It’s not worth digging the stuff up. The decline is historic. We were back to prices of 20 years ago on Monday morning. By afternoon the stuff was worth less than nothing.

This will change. The economy will rekindle, and the world still runs on oil, despite Mr. Musk. My fancy portfolio manager and analyst buddy Ryan says crude at $50-60 a barrel in 2021 is a definite possibility, once the surplus inventory is burned off. “I believe we’re close to the bottom.” So when something everybody needs loses 100% of its value in four months, guess what you should do?

There’s more. Look at poor REITs, pummeled because of the virus’ impact on commercial landlords and office towers empty of cubicle slaves. That will change. The world may have more online shopping and remote workers going forward, but this prime real estate will continue to pump out income. And then there are the poor preferred shares, yanked lower in terms of market value by central bank interest chops. The yields are delicious (near 6%), and it’s a certainty rates will gradually augment as economic activity resumes over the next two years. Tax-efficient capital gains happen when you buy low and sell high. This is low.

Will most people miss this stuff? You bet.

Will they stay home, scared? Yup.

Will they overstate risk? Guaranteed.

And they shall reap what they sow.

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April 20th, 2020

Posted In: The Greater Fool

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