October 18, 2020 | Nothing is Normal

First, Trump. Then Chrystia.

The world’s holding its virus-tinged breath awaiting November the 3rd and the outcome of the American election which has been as weird as expected. That crazy uncle is now being given a 12% chance of winning, while the boring old guy gets 87% odds (the latest from fivethirtyeight.com). But, who knows? 2016 was a surprise. And so far 2020 has been so predictable.

But after that’s out of the way, we’ll be dealing with the crew in Ottawa. Bloomberg reported Sunday that insiders are pointing to a Chrystia Freeland economic update/mini-budget and group hug in November. It will be the new finance minister’s first foray into, well, finances.

What to expect?

Way more spending, this time on a national pharmacare program, child care agenda, green initiatives and boodles for cities, where Covid has crashed revenues. With backing from the NDP, the Trudeau Libs are steaming ahead with the things contained in that Throne Speech (which you forgot about).

The current year’s deficit will increase to a level making the rest of Pierre Poilievre’s head melt. The shortfall for next year is already at $74 billion, and none of this new spending has even started. (The previous all-time high was Harper’s $56 billion at the height of the credit crisis. Seems quaint.)

In order to retain the Dippers in his pocket, Trudeau will likely embrace two of Singh’s demands: a return to CMHC-insured 30-year mortgages, so people can pickle themselves further in debt, and a doubling of the first-time homebuyer’s credit, so taxpayers pick up more of the closing costs on a house. The result of both of these measures? Yes, more upward pressure on prices. And more mortgage borrowing.

Here are two things to worry about:

First, our annual deficit (federal and provincial), as a share of the economy, will be the worst in the entire western world. More than Italy, Turkey. Argentina, Russia, India, America, Brazil…well, you get the picture. Nobody, anywhere, is spending money like our prime minister. So the inevitable consequences will be higher taxes, currency debasement, inflation and ultimately a sharper rise in interest rates. Mr. Bond Market is becoming aroused.

Second, mortgages are out of control. The massive deferrals of the last few months made the debt pile worse, and now this insane housing boom is pushing borrowing off the chart. Ten years ago outstanding mortgages equaled 59% of the economy. Now it’s 84%. The pointy-head analysts at UBS say Toronto is the worst bubble city in the world. With five-year mortgages at less than 2% and debt exploding higher, we’re massively at risk of any economic shock. Like another lockdown.

By the way, did you catch Benny Tal’s latest housing epistle? The CIBC economist is just shaking his head at what’s going on with residential real estate in the midst of the “worst ever” recession in Canada. It seems by pumping up prices in the teeth of economic chaos we’re making the wealth divide far worse. That’s because of who is buying properties.

The services-oriented nature of the current recession has led to a situation in which no less than 80% of jobs lost since February were in low-paying occupations, a notably higher share than in any other recession….we conclude that roughly 50% of the widely-quoted average home price inflation is due to a compositional factor in which activity in more expensive units (read: larger) is rising faster — adding to the overall average. In fact, we see this trend clearly in the rising share of ground-oriented units at the expense of high-rise units — a trend that makes sense given the nature of the crisis.

In other words, the virus nuked the jobs of blue-collar workers while millions of office workers just started their WFH episode. As rates tanked and at-home people suddenly craved more space, more nesting and bigger suburban backyards, real estate ignited. Detached properties outside the core went up. Condos went down. And the mortgages financing the action have blossomed. Historic levels of borrowing. All at rates which can only eventually go up, not down.

Being reasonable and non-hormonal, you might conclude this is unsustainable. You’re right. Canada cannot run these kinds of deficits without consequences. One of those will be upward pressure on the cost of money as the dollar devalues. And that will apply to more than $1.5 trillion in residential mortgages – even more of course, if we get 30-year amortizations back.

But wait. What if the government just forgives all the debts?

Remember that Internet conspiracy theory twaddle mentioned here last week about Ottawa locking us down again, building internment/isolation camps, then creating a debt jubilee in return for everyone handing over their property and assets? We told you to beware. That it would spread. And it has.

This was just published, down under: “Canadian politician leaks new Covid lockdown plan and ‘Great Reset’ dictatorship – Australia is part of it.”

I swear. 2021 cannot come soon enough.

Garth Turner October 18th, 2020

Posted In: The Greater Fool

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