June 30, 2020 | The Toll

First to go, Bandit and I noticed on a morning walk a month ago, was a slow fashion store. (I had to ask Dorothy what the hell that meant. Now I know.) Then her fav bookstore went down. An art gallery up the street has disappeared. So have the horse-drawn carriages. On the weekend the main coffee hangout on the corner opposite my office posted big “CLOSING” signs (above). Everything half price. Fixtures for sale. Fail.

Such is the toll of the virus on a tourist-based economy. As Air Canada and Westjet go, so goes the economic fate of thousands of small businesses. Hotels. B&Bs. Restaurants. Tour operators. Here’s what the entrepreneurs running the local coffee shop had to say to the community:

CLOSING DOWN  The uncertainty associated with the impact of COVID-19, especially in relation to its effects of tourism along with the considerable expense load that we carry, has forced us to make this decision. We are so very grateful to the amazing staff both past and present who joined us in establishing our unique business style. We tried to create a type of oasis where our customers were surrounded with tasteful and cheerful merchandise while enjoying the atmosphere of an old fashioned cafe. We would sincerely like to thank all our many customers for their continued support, it has been extremely rewarding to receive so many genuine compliments, literally on a worldwide basis. Sad day.

Sad indeed. The pooch and I walk every morning into the aroma of their roasting coffee beans. No such pleasure soon. Plus an empty storefront. Another one.

So the latest economic stats are grim. The Canadian economy shrank close to 12% in April, on top of a 7% dive in March. May probably saw a small (3%) uptick, so it’s safe to say we have about 16% less GDP than we did back in the halcyon days of Feb. By comparison, during the darkest days of the Great Depression – 1931 and 1932 – the economy withered by 10% annually. And here we are with a 16% tanking in a hundred days. Gulp.

This is the worst. Ever. All 20 sectors of the economy took a drubbing. Accommodation and food was obliterated with a 42% collapse, after a 37% drop the month before. It just doesn’t get any suckier. Entertainment and sports, down 25%. Construction, 23%. But online shopping up 17%.

Now, look at this. It’s a snapshot of Covidian chaos as of Tuesday morning. Things seem under control in Canada but are suddenly raging south of the border. Given the integration of the two economies, Trump and the inability of Americans to corral this bug, it suggests recovery may take a lot longer than new all hoped.

Seeing red: the virus erupts in 29 US states

Meanwhile many people you know are direct victims of this economic contraction, as they carry fat debt. Even as the virus was ravaging jobs, mortgage debt grew substantially in May – a new record high. And why? Not because of a ton of real estate sales, but rather thanks to deferred mortgage payments, which added to the overall debt load. The better part of a million households are not making loan payments, and haven’t for several months now.

The result: $1.08 billion in new debt added every four weeks to the steaming pile of $1.68 trillion, since folks choose not to service mortgages worth $180 billion. Payments they cannot or will not make are simply thrown on the heap – money that’ll have to be paid in the future. Mortgage growth of over 8% (annualized) during May was the highest in a decade. What an awful validation of the financial illiteracy of a nation of debt-snorflers.

So if Trump blows the virus challenge, US GDP tanks and true recovery takes a few years, what to do?

Play defence.

This is exactly why this tedious blog has yammered for years about the logic of having a balanced, diversified and liquid portfolio. It’s designed to dampen volatility and, unlike most husbands, be predictable. When darkness descends and markets fall, it protects you. When times are good, it joins in. Just look at the experience thus far in 2020.

Beyond this, pull in your horns. No big purchases. No investment condo. No leverage. Do not let 2% mortgages seduce you. Don’t defer debt, but pay it down instead. Take advantage of a localized real estate surge, based on pent-up demand, to unload. These are the days to crave maximum liquidity – wealth in negotiable securities, not tied up in a property that could soon take ages to flog.

Oh, and go buy something from the dude on the corner. There, but for the grace of dog, go thee.

Garth Turner June 30th, 2020

Posted In: The Greater Fool

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