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March 17, 2021 | Spring Things

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 end-of-winter update time. Pay attention.

First, whither your portfolio? Were those who said stocks sat at dangerous levels last year, as stimulus billions washed over society, right? How about people who warned that if bond yields/interest rates rose  financials would crack?

Here are the one-year gains for markets – suggesting if you bought in or hung tight during the Covid crash you were a genius (or read this blog). The Dow is ahead 55%, the S&P 56%, the tech-heavy Nasdaq (despite recent declines) up 81%, and even poor Bay Street has added 49%.

Is this just the start as vaccines inevitably defeat the virus, the planes fly, the global economy reopens and corps start making serious money again? Likely, since the US GDP is forecast to surge 8% in the next few quarters (incredible) and average 6% for 2021. Earnings for publicly-traded US companies are expected to grow 16% for the first quarter of this year, then 25% year/year over the following three months. And you know what higher profits do, right?

Right. If you held an ETF tracing the S&P 500, like SPY, you’ve reaped a 56% annual return. Ditto for Bay Street, where an exchange-traded fund like ZCN has jumped 48% in the past twelve months as the TSX advanced. And the benefit of an ETF over individual stocks is evident – diversification. No need to guess at picking six or ten individual companies and hoping one doesn’t blow up. Plus there’s still a yield which beats the trousers off a GIC.

Meanwhile, what of preferreds?

This blog was slagged mightily a year ago for telling you to buy and hold prefs since interest rates wouldn’t stay depressed forever. Rate-reset preferreds not only cough up a nice income stream, they also get more valuable as the cost of money rises. Like now. It was inevitable. So in the fixed-income portion of a 60/40 portfolio, having a fat slice devoted to preferreds gives a big offset to bonds, which fall in value as rates swell.

Thus ETFs holding these preferreds, like CPD or ZPR, are ahead more than 50% in a year. Actively-managed DXP has gained 60%. They also pay you to own them – a dividend in the 5% range, plus the dividend tax credit. They do everything but walk your dog.

Okay, but can this last? Haven’t financial assets been puffed by stimulus trillions, desperate central banks and spend-happy politicians?

Of course. This is the everything bubble we’ve been talking about. And while financial securities have reflected that, the truest representation of a world that cannot last is this…

BMO economist Rob Kavcic is at it again, charting a real estate market in Canada he now calls a ‘melt-up’ and ‘The Wild North’. That chart shows annual housing price gains of 17%, but over six months the annualized jump is 20%. Over the last 90 days it bloats to 40%. In short, says the expert, this is ‘parabolic.’ The bubble is now greater than in 2017, when governments moved hard to deflate things, and we’ve only started into the nutso spring rutting season.

Months of supply have crashed into the 45-day range, and Kavcic calls this an ‘extreme condition’:

Twenty-two of 26 major markets have seen the average transactions price rise by double-digits, with 20%-to-40% gains common. Markets that entered the pandemic in a position of strength (e.g., Toronto, Ottawa and Montreal) have strengthened further, while markets that were in the doldrums (e.g., Calgary, Edmonton, to a lesser extent Vancouver) have re-emerged. And, the strongest momentum is in what we can loosely call “cottage country”, with average price gains in some locations running around 50% y/y.

It’s a melt-up. That usually signals the final stage in a bubble market. Routine home-buyers become crazed purchasers as competition for scant inventory increases. Then the speckers and the flippers move in, aggressively shoving values higher. Finally, increasing interest rates cause a panic among those sitting on the fence, who plunge in months or years earlier than planned in order the get a cheap loan. Future demand is wrenched forward.

So what’s the difference between romping financial assets and galloping house prices?

Lots. Corporations make money, pay dividends, increase in intrinsic value as they expand and have shares convertible into cash in two seconds. Houses cost money to own, require big fees to buy or sell, pay no dividend (but you can live there) and can turn illiquid fast when markets cool.

However the biggest difference may be how value is established. Most stock valuations are related to P/E ratios (p=price, e=earnings). But most houses are selling based on FOMO – the fear people have that they’ll cost more later. Logic on one side (equities). Emotion on the other (real estate). Oh yeah, and investors usually buy financial assets with cash. House buyers normally use leverage – and often 20x.

Will governments bring in new regs to cool off the stock market, reducing investment in corporations that provide jobs? Not a chance. Is intervention possible to tame a melting-up property market which threatens to shut the middle class out of home ownership? You bet.

Invest accordingly.

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March 17th, 2021

Posted In: The Greater Fool

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