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May 29, 2020 | What Matters

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 news was enough to freak Amy out. Like she needed more of it.

The economy’s shrunk faster than a dude in a lake – 8% in March (and half of that month was pre-virus). This is Great Depression stuff. Imagine what the April and May numbers will be. Ugh. Also a bank just cut its dividend. So are things starting to unravel?

Here’s her situation, and her fear.

I have been reading your blog for years, and while I was in a relationship, had my money invested jointly.  When the partner parted I moved to a self directed brokerage (TD Waterhouse) and that worked well for me over the past five years.  I have since retired, living on CPP, OAS, GIS and dipping into my TFSA dividends to make ends meet.  I rent an old apartment in Hope BC; after a lifetime in Victoria, I couldn’t afford to retire there.

Before COVID my portfolio (maxed TFSA & RRSP) was at $100k, not much to speak for, but two divorces and 16 yrs of being a single mom, has been devastating financially.  Given the present global situation, my portfolio is down 35%.  I am prepared to ride it out, however a close friend is impressing the “inevitable ” on me, meaning now the banks will fail and I should sell off my investments and buy silver and gold.  I can’t afford to get this wrong.  Your thoughts?

First, Amy, the ‘bank’ cutting its dividend is more like a glorified credit union. The Laurentian Bank has been lackluster for years, forced to pay off staff and close 50 branches in Quebec. Total assets are $35 billion, which sounds like a lot. But the Royal Bank is worth $1.5 trillion, and probably has a few billion lying around for pizzas-&-beer on Fridays.

So, none of the Big Six will be cutting, suspending, trimming or otherwise diddling with their dividends. No bank will fail. Never will there be any bail-in provisions triggered. Your bank-held assets are safe and dry.

Now, this does not mean the bankers aren’t sweating a few bullets, thanks to Covid. These ae testy times on Bay Street, which is why bank stocks shed about 20% of their value since the virus came to town. Eight million Canadians are on the dole and almost a million can’t/won’t pay their mortgages. Tons of small business clients are going paws-up over the next few months. Defaults on home loans are expected to increase, as are consumer bankruptcies. HELOCs, car loans, business LOCs – lots of debt will sour.

In response, the banks have set aside almost $11 billion to cover these anticipated loan losses. Doing so has crashed their profit numbers, but it was the correct action. Says TD’s chief financial officer: ““What we’re living through here is an unprecedented shutdown of large segments of the economy, which is impacting consumers and businesses and customer activity in unprecedented ways. We’ve looked at our provisions and applied a good measure of prudence to make sure that we are prepared to weather this pandemic.”

Amy, babe, worry about something else. Not the banks. They’ve got this handled.

So, about your portfolio. Let’s start there. If it tanked 35% you’re not balanced, not diversified and had way too much equity exposure for a wrinklie (or anyone else). A B&D portfolio shed far less than stock markets  and has steadily crawled back since then. With a hundred grand in two registered accounts, you should have just a few positions – balanced ETFs with exposure to North American and international markets plus some bonds and REITs. If you have no preferred fund, this is the time to get one. Cheap. Six per cent yield.

The worst possible move would be to go to cash, then buy a bunch of rocks. Gold and silver are purely speculative, highly volatile, pay no interest, no dividends, no income. You can’t easily trade this stuff (especially in rural BC), nor can you chew off a hunk to buy groceries with at Save On. Bullion is the emotional crutch of the prepper set, and goes nice with semi-automatics, sheep manure and the Old Testament. But it has no place in the modern portfolio of a retired, single woman who needs dependable cash flow.

Now, will things get worse?

Of course. What happens when the CERB, the mortgage deferrals and the emergency business loans/rent subsidies end? More contraction. Many business failures. Household distress. Forced property sales. Just what you’d expect when the jobless rate stays north of 10% and the free government money ends. This is the scenario the bankers are readying for with their eleven billion in bad-money reserves.

At that point anything can happen. The T2 gang might keep the benefits going, ensuring that your grandchildren’s offspring are taxed mercilessly. Or maybe the virus sneaks back. And what about the US election in November? How does that possibly end well?

All of this you cannot know, Amy. Nor can anyone.

But this is not our first disaster. And pandemics are temporary. You may think it’s different this time. It is not.

Even if it were, fretting over events you cannot control only wastes what matters. Without time, nothing has value. Even in Hope.

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May 29th, 2020

Posted In: The Greater Fool

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