On more than one occasion I have been quizzed about the future of some stock market-or-other to the lack of satisfaction of the quizzer. Invariably the conversation goes something like: “What with all the money being printed and the new highs of the stock market, shouldn’t it all come down?” And my answer is usually, “No.”
This is frustrating for people because there is a real feeling that the stock market in the United States should not be doing as well as its doing. Some of this comes from the incongruity of negative media reports about the US economy and the ever growing stock market, some comes from the lingering shock of 2008, and some from an intellectual class that feel that our economic future is built on sand.
But a large reason for my belief in future growth is in looking past the fear of “big numbers.” When the stock market has a correction it’s often pointed out that it had just reached new highs. But this doesn’t mean that all new highs equal a market correction. The subtext is that there must be some limit to the growth in the market and that a new “all time high” must transcend this natural barrier, creating a bubble.
This is a populist understanding of market bubbles and has little to do with reality. The market should grow and reflect a burgeoning economy, and while the American economy has struggled its companies have continued to post substantial profits and many of them have either continued to grow in the slower market, or have begun to offer or expand dividends, making them more attractive.
The simple truth is crashes happen at market highs, but not because of them. Bubbles are not simply a quickly growing market, but represent a detachment between market fundamentals and a rapidly rising price, fed by the enthusiasm for rapidly growing prices.
This week the Financial Times reported that “Canada’s housing market exhibits many of the symptoms that preceded disruptive housing downturns in other developed economies, namely overbuilding, overvaluation and excessive household debt.”
These comments made by economist David Madani have been repeated and echoed by a number of other groups, all of whom cite Canada’s low interest rates and large household debt (now 163% of disposable income according to Statistics Canada) as a source of significant danger to the Canadian economy.
This is not a view shared by Robert Kavic of BMO Nesbitt Burns who believes that the Canadian housing market has long legs, saying “Cue the bubble mongers!”
Since 2008 predicting the fall of housing markets has become a popular spectator sport. Canada seems to have sidestepped most of the downturn, which has only made calls for the failing of Canada’s housing markets greater. But the reality is that our housing markets are very hot, and we do have lots of debt.
So is Canada’s housing market heading for a crash? Maybe. And even if it was its hard to know what to do. Fundamentals in Canada’s housing sector remain strong (and have improved). People also want to live in Canadian cities, with 100,000 people moving annually to Toronto alone. In other words, there is lots of demand. In addition regulations in the Canadian financial sector prevent similar scenarios that were seen in the United States, Spain and Ireland from occurring.
But housing prices can’t go up forever, and the more burdensome Canadian debt becomes the more sensitive the Canadian economy will become to interest rate changes. Meanwhile I have grown far more weary of over confident economists assuring the general public that “nothing can go wrong.”
The big lesson here is probably that your house is a bad financial investment, but a great place to live. Unless you own your home, a house tends to be the bank’s asset and not yours. In addition your home, like your car, needs constant maintenance to retain its value. So if you wanted to buy a house to live in, good for you. If you want to buy a house as an investment my question to you is, “Is this really expensive investment the best investment in a world of financial opportunities?”
If you happened to pick up the Toronto Metro paper on Thursday morning, you might have noticed an article claiming that “experts” said that the scandal is bad for businesses in Toronto. It’s been echoed by other news outlets as well, including the CBC.
This is the kind of assertion that’s easy to make, but rarely seems to be backed by any hard numbers. While its true that Toronto Region Board of Trade would like Rob Ford to step aside, its not uncommon for businesses to be overly sensitive to potential threats. But while we may not enjoy the additional and unflattering media coverage regardless of how funny it might be, it’s hard to see how Rob Ford’s personal life can overpower an entire city.
Because of the circus that is Rob Ford attracts so much attention, many feel like he can do permanent damage to the reputation of the city. But cities are much bigger than their mayors, and few cities have ever been held back by the sordid private lives of their politicians. If you don’t believe me, simply compare the fates of Detroit to Washington D.C. and guess what was more damaging, the collapse of the auto industry, or Marion Barry’s own drug related escapades?
In the end the only lasting damage that a mayor or city council can do to us will be in the form of poor infrastructure and runaway costs. In other words the damage Rob Ford was doing before we learned about his crack use.
I’ve just finished a Fideltiy Investments Tax Clinic, and it was filled with some great ideas about how to help people manage their investments with tax implications in mind. But what really jumped out at me is how retirees are being penalized under the current tax system.
The 2013 budget closed a number of investment loopholes that they felt were being abused by large corporations. One of these was a structure called a Capital Yield Class (aka character conversion transactions), which when reduced down to its basics allowed investors to benefit from conservative yield generating investments, like bonds and dividend funds, while converting their income into more tax friendly capital gains.
Closing that loophole may help preserve Canada’s tax base, but it raises questions for retirees. As people start retiring there will likely be a growing demand for conservative investments that are mindful of taxes. Between pensions, RRIF payments and the CPP its not improbable that retirees with sufficient income may find themselves paying a HIGHER rate of income tax than people with a comparable salary!
This is where the government can be incredibly useful. There is clearly a need for smart taxable strategies that benefit retirees beyond RRIFs and the CPP, but shares the same clarity as those products. Any solution that the government supplies would be unlikely to make everyone happy, but it would provide certainty to retirees and those approaching retirement that they are choosing the soundest investment solutions.
The Conservative Party has shown a lot of responsibility when it comes to taxes, as well as a strong populist streak not always in keeping with “business minded” political parties. This has meant ending Income Trusts and Capital Yield funds while introducing the TFSA and a potentially divisive income splitting proposal. But as the Canadian population continues to age smart political parties will likely continue to focus on the needs of that growing demographic.
In the long fight to encourage people to save money, there is a theory that the money we fritter away on small treats is actually bankrupting us. Coined “The Latte Factor” by David Bach, a personal finance guru formerly a Morgan Stanley broker, it caught on like wildfire after he appeared on Oprah in 2004. Already the author of the popular book Smart Women Finish Rich, David’s idea was that the small expenditures on things like Starbucks lattes, the occasional lunch out and other “treats” that we give ourselves were bankrupting our future.
It didn’t work mathematically. It didn’t work in terms of what we were actually spending our money on. And it didn’t take into account what life costs were actually rising or falling.
– From Pound Foolish: Exposing the Dark Side of the Personal Finance Industry
As the reality often is with personal finance gurus, they need a hook, and Mr. Bach had a great one with the “Latte Factor” (a term he’d trademarked no less). But to make his numbers more impressive he would fudge them and round up, forget inflation and taxes and grant a very rosy investment picture so he could demonstrate his luxury cutting routine could equal millions of dollars saved.
But while Helaine Olen may have sussed out Bach’s faulty math, I don’t think the idea is a total waste.
Lots of 20 and 30 somethings struggle with saving. Retirement seems so far away as to be in another galaxy. Debt is normally quite high, either because of student loans or because of mortgages and new families. In other words lots of money is being funnelled into cost of living and debt repayment and little money finds its way into direct investments.
But lots of young people do drink lattes. And go out on the town. And eat out. In other words people between the age of 20 to 35 do have lots of money that is being spent on small luxuries. Getting a hold of those costs could easily lead to small, but incremental investments.
Now is the time to turn away from flash finance gurus like Mr. Bach and towards the steady hand of David Chilton and his seminal book The Wealthy Barber. 25 years after it was first published it still has some of the best advice about saving that anyone can take. Pay yourself first! Set up an automatic withdrawal on your pay-days and put it into your RRSP or TFSA. You won’t notice its even gone, and you’ll thank yourself later.
Need help getting control of those little luxuries? Check out mint.com – a free site that can help you budget, or give us a call to discuss some easy ways to save.
- Why Ditching Your Daily Coffee Habit Isn’t The Best Savings Plan (businessinsider.com)
Whether you think that Mayor Ford is great at his job, some terrible buffoon or actually a buffoon that is great at his job, there’s no doubt that we are all paying attention to his antics. But while Rob Ford’s behaviour may be giving Toronto a “black eye” internationally the reality is that it probably isn’t going to make much of a difference when it comes to Toronto’s economy.
Rob Ford – Toronto’s besieged mayor
The real economic impact of Rob Ford will likely have nothing to do with his drug use, but more to do with his continued fight for cars against LRTs and bicycles. Mayor Ford is a car enthusiast, and he isn’t alone. In many of Toronto’s sprawling suburbs cars are king and public transit is largely relegated to buses. But the real complaint that car drivers have is in their commute.
Toronto is said to have the worst commute times of 19 major cities in a study completed in 2010. On average a round trip commute in the GTA is 80 minutes long, 24 minutes longer than drivers in LA and 32 minutes longer than drivers in Barcelona. This gridlock comes with a cost. In 2006 that cost was estimated to be about $3.3 billion, a result of travel delays, stress on vehicles, increased likelihood of traffic collisions and impact on the environment. Additionally there was also a loss to GDP from travel delays, which amounted to an additional $2.7 billion.
Since 2006 these numbers only seem to increase. In 2011 Toronto’s Board of Trade said that gridlock was now the greatest threat to economic prosperity in the region and estimated that the cost of all the gridlock was $6 billion annually and growing. That cost was updated again this year by the C.D. Howe Institute, now estimated to be about $11 billion.
In the midst of this are politicians fighting over whether we should have subways or LRTs. This is all proving to be bad both for our financial health, but also just plain bad economics. Subways, it is argued are a great investment, though they come with a high price tag. But if a subway line operates at less than full capacity it also serves to suck money out of public coffers. Maintenance for subways are also high, and while subways move many more people around you need people to make them profitable. But the other bad economic idea is the love affair with the car. Cars receive enormous public subsidies, in the form of dedicated roadways, highways, public parking spaces and mandated parking spots in new buildings. While this cost seems largely invisible it is still there, hitting our pocket book.
All of this amounts to an economic failure for Rob Ford. An inability to rally the city to one transit vision, his or anyone else’s, means that Toronto is stuck in gridlock and that is a real embarrassment.
Great Further Reading: Straphanger: Saving our Cities and Ourselves from the Automobile by Taras Grescoe
Driving through mid-town the other day I caught a sign that said “Stop the Alaska Condo”. Not knowing anything about it I looked it up and was met with an inspiring, modern design to replace 28 family units with 130 new units of housing around Yonge and Strathgowan.
The Proposed Alaska Condo
Of course there is a neighbourhood association who are protesting its development. Reasons to protest include “safety” (left considerably vague), that it will introduce a number of new people and cars and that it isn’t in keeping with the village’s rustic aesthetic. The Uptown Yonge Neighbourhood Alliance acknowledges the need of urban redevelopment, just not that urban redevelopment.
Cities are more than just crowded places that people live. They are the modern backbone of vibrant economies. Toronto itself accounts for 11% of Canada’s total GDP, and depends on a growing number of people to provide tax revenues, employment and businesses. In his book Triumph of the City, author Edward Glaeser outlines how cities provide networks that spawn a creative class and strengthen our economies.
But far more concerning is how in modern times cities have also become a mess of regulations that are stifling growth. Not economic growth, but residential growth. Urban density helps make neighbourhoods more prosperous and with a wider more successful variety of services. But as is the case with the Alaska Condo, proposals to increase density often face strong resistance. I tend to view this resistance as not only cutting off one’s nose, but as immoral too. Toronto is a bustling city, whose cost of living continues to skyrocket because of lack of housing. In the rush to try and prevent change to our city we are not only choking off our future economic vitality, but punishing people financially with ever increasing home ownership and rental costs, even as more and more of our economy depends on service sector work and less on manufacturing.
I have no doubt that the members of the Uptown Yonge Neighbourhood Alliance feel very passionately about their cause, but I’m afraid it boils down to little more than NIMBY-ism. People need places to live, and the Yonge & Strathgowan area will benefit from some lower cost housing and all the new residents, who will bring money, taxes and businesses to the area.
Further Reading: The Rent is Too Damn High by Matt Yglesias
One of the benefits of being a financial advisor is the occasional one-on-one meeting you get with Portfolio Mangers (PM) and the opportunities to pick their brains. This week began for me by sitting down with AGF manager Richard McGrath, a PM based in Dublin who helps manage some global and european funds.
This was great opportunity to get some first hand information about what is going on in Europe. Following 2008, the Eurozone, easily the largest economy in the world, has been hit pretty hard. Strict austerity measures and public unrest have long painted a picture of a Europe constantly on the brink of failure. 2011 was easily the worst year as Greece got perilously close to defaulting on its debt as Germany and the Troika (the European Commission, the EU Central Bank and the International Monetary Fund) played hardball looking for more political concessions from Greece.
The fact remains that big financial crises like 2008 have long tails, and Europe has been beaten-up very badly, with big reductions in their GDP, large unemployment figures and generally all-round bad economic news. And yet no storm lasts forever. Despite a difficult political structure, a burgeoning recovery seems to be underway.
Richard McGrath seems to think so at least, and I share many of his views. Some of the good news is really less bad news. For instance in Ireland continued austerity was expected to cut €3.6 billion from government spending, but as the economy improves that number has been dropped to €2.5 billion. There are lots of little stories like this helping to outline a general recovery in the Eurozone. Bloomberg reported on October 23rd that Spain had ended 9 consecutive quarters of negative economic growth, with an anemic 0.1% growth rate. Not great, but it still goes in the “good news column”.
It’s worth remembering that negative news abounds in the United States, but their stock markets have reached all time highs (again) and that after several bad years European markets have also done very well this year. But from the perspective of watching markets its important to take notice when GDP growth turns positive (Germany, France, Spain, UK – Societe Generale, September 9, 2013), investment flows start gaining (Societe Generale), all the while valuations are considerably lower, and therefore cheaper than other well performing markets (Thomson Reurters Datastream, October 21st, 2013). All of this points to one conclusion, you can’t trust the media. With it’s constant focus on negative news you might miss some of the best growth opportunities!