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July 7, 2021 | Muddled

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.

In a moment, more taxes. First, common sense.

Stocks markets flared higher again Wednesday as bond yields sank. The US 10-year Treasury yield has plopped to just 1.3% after it leapt to 1.75% in March. Bond yields go down and bond prices go up when investors think things might get squirrelly and fixed income is a safe place to hide. Is that what this means?

And as yields tank, techs soar. The work-from-home stocks like Apple and Amazon have swollen mightily in the last few days, dragging indices higher. Recently a correlation has developed between the FAANGs (Google it) and the cost of money. When bond yields topple, techs surge. Also of note, when bonds go up, banks go down. Lower yields hurt profitability, so the financials have been in retreat.

What does this mean? After all, with vaccination rates blossoming, pandemic restrictions ending, airplanes flying again and borders less hard, the recent buzz has been about the ‘reopening trade’ and oodles of inflation as the service sector comes alive again.

Well, not so fast. Seems we have a massive labour problem – as in, not enough of it. There are millions more jobs available in the US right now than workers who want them. In Canada government largesse, CERB and the son-of-CERB are being blamed for restaurants, food processors, farms, manufacturing plants, tourism operators, hair salons and retailers unable to staff up.

Meanwhile a new federal consumer survey reports that four in ten Canadians currently are not in the workplace never want to go back. This runs counter to what most employers expect (and may demand), so it looks like there’s one big battle about to take place. More pressure on productivity.

Wow. Jobs going begging. Bosses hamstrung and snubbed. Employees rebelling. Offices and workplaces hauntingly empty. A nation of people in sweatpants, sleeping in and walking the pooch whenever they feel like it. It’s got markets second-guessing the reopening euphoria, pushing the pause button on yields and inflation and making Bezos even wealthier. That ‘rotation’ from tech to value companies (like the banks) has just painfully rotated back.

The question: should you care? Is this a thing? Do you need to chase it?

Nah. Of course not. The point of having a B&D portfolios is that you need not scurry after anything. If you own some bonds, they just got more valuable. If you have ETFs holding the broad market, the surging tech stocks have pulled everything up. Good. Preferreds and real estate investment trusts get shellacked like always when yields fall and people refuse to go to the office, but we know this is a temporary hissyfit. The point of investing is to achieve two goals: (a) don’t lose money and (b) make a reasonable rate of return.

Common sense tells us to stay the course. GDP growth will be epic in the rest of 2021 and next year. Corporate profits are expected to be 40% to 50% higher than year-ago levels. Central banks remain accommodative and in Canada we’re about to go into a federal election in which the government party has absolutely no fiscal discipline meaning everyone gets a puppy. Or a pony. Your choice.

Stay balanced. Keep globally invested. And remain diversified.

Now, a few words on poor Toronto where a detached house costs $1.75 million (on average) and there is currently the highest apartment vacancy rate in 50 years. So what are the local politicians going to do in a city where so few people without houses can afford one? Yup, tax them more.

Aping the lefties who run BC and its largest city, Toronto will have an empty house tax in a few months. Anyone who doesn’t sleep at least 184 times each year in the same bed will see it taxed at 1% of assessed value (and assessment are about to explode after a two-year hiatus). The impetus for this (city hall says) is to free up more rental accommodation and make real estate affordable.

Of course, there are tens of thousands of empty units already on the rental market which are (thanks to Covid) unoccupied. The vacancy rate was 1% before he pandemic and now it’s close to 6%. Rents last year cratered 20% and still haven’t recovered. So the ‘empty house’ tax is just a tax grab. It’s a whack against amateur landlords who already have been chewed up by provincial legislation banning evictions and had no recourse to the tenant-LL tribunal.

Will the tax put more rental units on the market? Nope. Unlikely. But it’ll probably cause many investors to sell tenantless condos, reducing available stock. Yes, fewer places for lease. A lower vacancy rate as the city revives in the coming months. Upward pressure on rents. And a tax making everything worse.

By the way, most of these local pols also want an enhanced land transfer tax imposed on houses selling for more than $2 million. Already that tax amounts to $72,950. For nothing. (I remember building my first house for less than that.) Now that the average detached is almost $1.8 million, boosting this gouging tax further would – in the eyes of realtors (of course) and the CD Howe Institute (right-wingers) – cause fewer people to buy, or move or put their current homes up for sale. Yup, tighter market conditions. More price pressure.

Math is hard. Getting elected is not.

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July 7th, 2021

Posted In: The Greater Fool

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