Aligned Capital Partners Inc. – Page 2

The Undiscovered Country

Pandemics, plagues and other disasters have previously heralded major changes to economic and social landscapes. Most notably, the Black Death had the effect of badly eroding the existing feudal structure. Literally so many people died that feudal lords had to entice serfs to come and work their land or risk it sitting fallow. The Irish potato famine, which reversed the demographic trends in Ireland and made it an outlier in European population growth, also drastically improved the lives of those that survived the famine. This pandemic will be no different, changing the fortunes of many by the time it is gone.

While I wait for books on our current situation, governments aren’t sitting idly by. Faced with an unprecedented crisis, politicians have cried havoc and let slip the public purse strings, passing huge relief bills and providing large social support to ease the monetary impact of global shutdowns and the sudden halt to economies.

This marks a serious departure from what might be considered “peace time” economic management. In normal times, and for much of the past 40 years, control of the economy has been left in the hands of central banks who have manipulated the overnight lending rates (or key interest rates) to encourage or retard economic growth. Even if you haven’t paid much attention to the work of central banks you are likely familiar with some of the most notable names. Alan Greenspan in the 1990s, Ben Bernanke through the financial crisis, and Mark Carney as the Governor of the Bank of Canada and then Governor of the Bank of England have all helmed a central bank and were a staple of economic news and forecasting.

The job of setting rates was to encourage growth and mange inflation; increasing the cost of borrowing should slow economic growth and curb inflation, while cutting rates should make borrowing cheaper and speed up economic growth. But since 2008, with rates hovering at near zero and now a global pandemic destroying wealth, governments have had to take a more active roll in direct economic management.

Enter Modern Monetary Theory, or MMT, the new(ish) idea that governments can largely spend their way out of problems and that fiscal deficits may be the cure for what ails us. The theory has been nicely (and optimistically) covered in the book “The Deficit Myth” by Stephanie Kelton, who argues that our understanding of money and taxes are wrong and as a result we have misunderstood the best way to deal with wealth inequality and job creation.

Kelton’s book is well written, but natural criticisms of her argument feel conspicuously absent. The crux of her thesis is that so long as you’re a “monetary sovereign”, that is a nation that issues its own currency and issues debt in its own currency, its impossible to go bankrupt. In addition, concerns that printing your own money might lead to inflation are not well grounded and that governments are not running deficits large enough to get to full employment. Some of this makes sense, indeed for many years we’ve seen countless countries like Canada, the United States and Japan all run very large deficits with no serious repercussions. But much of the language in the book feels unusually precise, navigating us around large objections with clever rhetorical sleight of hand. Where anyone with a passing understanding might wonder how it is that countries that have previously succumbed to too much debt and hyperinflation didn’t reap the benefits of MMT, the book is quick warn that you don’t want to have the “wrong” type of deficit and that too much spending can be detrimental, before rushing the reader off to see what can be done with MMT to fix pressing issues.

Whether this is a good idea or not, MMT has found a champion in Justin Trudeau, a prime minister for whom spending money as a political solution is as constant as the northern star. Reportedly our new finance minister Chrystia Freeland may be a fan too, a departure from the more traditional Bay Street pedigree of Bill Morneau. But even if our most senior politicians do not have any explicit endorsement of MMT, the direction of spending and the behavior of the Bank of Canada suggests the Modern Monetary Theory is central to current government policy.

Since March, the Bank of Canada has purchased the vast bulk of Canadian government issuances, particularly at the long end of the yield curve (debt that matures in over 11 years), and by the end of 2021 the BoC is expected to hold 60% of all outstanding Government of Canada securities. Intentional or otherwise, this is what MMT looks like, with the government effectively issuing debt to itself so it can spend more. And currently Canada is on track to run the largest deficits of any country, developed or otherwise, in the world.

Governments frequently run deficits but have relied on efforts of slowed spending and economic growth to reduce the long-term debt burden. In fact, it has very rarely been the case that governments ever cut spending, more frequently simply reducing future promised spending below predicted rates of inflation. Yet despite the fact that no government I can think have has run a surplus over the last decade, the belief that we haven’t spent enough will likely only be a reassuring message to governments looking for opportunities to improve their standing in the polls.

but the very best part of yesterday was Tiff announcing his pivot to buy long maturities at almost the same moment Chrystia was explaining she will be issuing long maturities https://t.co/Q1aokBOUSM
— not inklessPW 💎 (@inklessPW) October 29, 2020

Under MMT, politicians like Donald Trump actually look very good (this goes unacknowledged by Kelton, but its impossible to miss). Trump’s lavish spending and huge deficits did seem to have the desired impact of reducing unemployment to below 4%, much lower than the previously believed “natural” rate of unemployment of 5%. And as a result of the pandemic, the US deficit moved from an expected $1 Trillion in 2020, to about $3.7 Trillion for the year. It’s currently an open-ended question how much more needs to be spent before the deficit will be large enough to offset the impact of Covid-19, let alone all the other ills that society faces. Given that most economists are calling for even more spending into 2021 and maybe even 2022, its hard to imagine how big a cheque will need to be written.

A central tenet of our society has been that debt makes us weaker, and that unconstrained spending, either by a household or a government will inevitably become a problem if left unchecked. Modern Monetary theory turns this on its head, and while the theory is serious it would likely not have found mainstream consideration were it not for the pandemic. Like feudal lords forced to consider paying serfs to work their lands, politicians are having to make peace with running huge deficits and manage ballooning debts.

But MMT remains untested, its ideas about money, debt and financial sovereignty are theoretical. Our relationship to debt and our ideas about preserving wealth are very old and persistent, while those that have broken the bond of fiscal prudence, be it Greece in 2011, Zimbabwe in the 1990s, the Weimer Republic in post war Germany or Revolutionary France, have always ended in defaults and hyper-inflation.

I remain skeptical of ideas like MMT, but open to new approaches where old ones seem to be failing. Covid-19 will likely be with us until 2022, putting pressure on all levels of government for the immediate future. Politically, Western nations weren’t doing well prior to the pandemic, plagued with populist political insurgencies, a retreating liberal order and lack luster economic growth. Now with a mountain of new problems, MMT offers perhaps a path to saving economies and people’s livelihoods by freeing us from previous assumed constraints, but carries with it awesome risk. Will our political class be able to resist borrowing or printing too much? We may have no choice but to embark on this path, into an undiscovered country.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of Aligned Capital Partners Inc.

October 29, 2020November 9, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Beyond Protests and The Police

While protests may not be, strictly speaking, market-based news, the size and scope of the protests regarding police violence and black lives makes them hard to ignore regardless of context. So far, these massive public demonstrations have not had an impact on markets (though they may yet on the spread of Covid-19), and have garnered a mixed reaction in the wider society. Whether police will be held to a level of greater accountability for actions that result in death remains to be seen, and regardless of what reforming actions are taken by police departments its quite obvious that it will take years to overcome distrust of authorities in some communities.

A more interesting aspect of the protests have been calls to “defund the police”, a rallying cry that either means exactly what it says, or sparks 15 minutes of explanations as it “doesn’t mean quite what it sounds like”. The arguments for it do make some sense though, and within some police departments there is sympathy for the idea that too much is asked of the police, resulting in a hodgepodge of policy goals foisted on a group simply not equipped to handle them. Currently the same people who have to deal with a domestic disturbance and oppose criminal gangs are the same people that have to help those with serious mental health issues and spend their days collecting revenue for cities. Not all these jobs should likely fall on the same person.

This raises an interesting point, which is how our political class has largely sidestepped any of the blame aimed at police departments. Police only enforce the laws that they have on the books, and true to any bureaucratic industry, we have lots of laws on the books. So many laws in fact that it is practically impossible to know what they all are. By-laws are added with little consideration for what has preceded it, speed limits seem set arbitrarily and may be subject to change, some laws are posted while others invisible. Which laws are enforced and where is left to the discretion of the police at the time. Many laws end up serving an unintended dual function, launched ostensibly to combat thing A, but end up serving issue B.

Consider that in 2008, Ontario passed a law making it illegal to smoke in a car in the presence of a minor, someone under the age of 16. This was part of a long campaign aimed at discouraging smoking in public that bore some superficial resemblance to other laws that discouraged smoking by making it harder to do in social settings. But where as smoking in public on patios and bars limited where you could go, this new law invited police into a citizen’s private space and criminalized behavior that was, at least under the laws of the province, still kind of legal. But the real issue here is who the law inadvertently targets.

Despite continued drops in the number of people smoking, those people that do smoke are statistically more likely to be poorer with more minimal education. According to the CDC 30% of people below and 25% of those at or just above the poverty line smoke, while those at more than double the poverty level only smoke at a rate of about 15%. In short the people most likely smoking in their car won’t be found in Leaside, but might be found in one of Toronto’s less affluent but already heavily policed neighborhoods. This law isn’t intended to target minorities or the poor, but put in the hands of police who are already tasked with policing higher crime areas (again areas that tend towards being poorer and with higher populations of minorities and new Canadians) it puts another class of previously non-offending people into potential confrontations with the police.

You may remember the death of Eric Garner in 2014. Another black American who died in the arms of a police officer that was caught on camera, Garner had been placed in a choke hold and had died from lack of asphyxiation. Garner’s crime, that had led him to this confrontation with multiple police, was for selling “loose cigarettes”. As part of a style of policing called “broken windows”, police had been instructed by the highest levels of authority within civilian politics to crack down on minor crimes to scare off larger criminal enterprises. Tackling the “loose cigarette” problem ultimately involved “the deployment of special plainclothes unit, two sergeants, and uniformed backup” to arrest a man selling cigarettes for a dollar who had been arrested 12 previous times. At no point did anyone wonder if this was a useful deployment of resources, or whether re-arresting a man who had already been arrest 12 times might finally break his habit.

You might be tempted to imagine that police would simply look the other way when silly or impractical laws find their way onto the books, but this too is a problem. Indeed, we know that the police can sometimes be given directives to enforce some laws over others. But the law cannot function effectively when it is applied only at the discretion by those in authority. If a law cannot be practically enforced or only enforced unevenly, it probably shouldn’t be a law at all.

Politicians remain responsive to their voters, particularly so at municipal levels. That can put enormous pressure on them to pass laws that are intended to fix social ills for moral reasons, but our politicians should be mindful that every law passed puts potentially puts citizens into conflict with the police. So long as the police remain the first line of citizen’s interaction with the state’s power, whether it be for jay walking, speeding, parking illegally, domestic disturbances, assault, or more serious illegal activity, any action can theoretically become fatal. Recently two young people died during police interventions in the GTA. The first was a young woman named Regis Korchinski-Paquet, who fell from a balcony during a mental health crisis when police showed up to take her to CAMH. The second, D’Andre Campbell was shot by police in his home in Brampton when police were called because he was having a schizophrenic episode. How culpable the police were in these events is the subject of much debate, but families in both instances have wondered aloud whether it is the police that should be the people who come during a mental health crisis.

While Canada’s problems are mercifully not those of the United States (the proliferation of guns and the militarization of police are fortunately not major issues here), that shouldn’t excuse politicians who make noise about police excesses while being quick to use the law to fix minor grievances. While the police continue to do their own reviews and consider reforms, politicians should perhaps begin considering an audit of the numerous laws that we keep and whether it still makes sense to be ticketing people for jaywalking, working out in a park, or issuing fines to children who run a lemonade stand, especially when these laws can not be enforced with any consistency. Whether our politicians can rise to meet even this challenge remains to be seen.

*In addition to the linked articles within this post, I have also referenced the book The End of Policing by Alex S. Vitale for anyone interested in the arguments of defunding or abolishing the police.

June 22, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Water and the Future of Global Conflict

It is hardly news that water is precious. Despite the planet being 70% water, only 2.5% is fresh and of that only 0.007% is available for human use. It should also not come as a surprise then that as societies get richer and develop their water needs grow to match industrial and personal consumption, making water not simply an essential resource for nations, but also between nations.

As nations in Africa and Asia continue to make great leaps forward in economic prosperity, water needs are putting those countries at odds with one another. Very few places are like Canada or Indonesia, self sufficient in water and not relying on shared water basins. Most nations share water with multiple other countries, necessitating treaties for its use. But even then, the changing economic fates of nations may mean that treaties become useless and fall out of date.

In 1959 Egypt and Sudan signed a treaty to regulate water use between them ensuring that Egypt would receive the bulk of the Nile’s water, but the world’s longest river flows through 10 other countries, many thousands of kilometers away, all of whom need that water to economically develop. In the past few years, as African nations have grown and stabilized following the 1990s, their own economic goals have started to clash with the older and more established economy of Egypt. In 2010 Ethiopia, Rwanda, Tanzania, Uganda, and Kenya signed an agreement aimed at stripping Egypt’s water rights from the 1959 agreement. It would create a new “Nile Basin Commission” to manage water sharing. In 2011 Burundi signed as well, and so far three of the countries have ratified the agreement.

In Asia water represents one potential flashpoint among many between China and any number of countries. Since Tibet was annexed by China in the 1950s the Chinese have secured the source of water to more nations than any other country, and today the most water that flows across borders from one country to another flows from China. Chinese actions to control water has meant that nations as diverse as India, Cambodia, Vietnam and Russia have all filed international grievances over shared water use. Water is also a flashpoint between Pakistan and India. The largely empty high altitude land of Kashmir, contested land that has been the source of three wars (two with Pakistan and one with China), is home to much of the tributaries that feed the Indus, which remains the primary source of water for agriculture in Pakistan.

An Indian soldier stands guard at the border with China in Kashmir

Sharing water isn’t simply an issue between nations, but an issue within nations too. In 2016, the Indian the states of Karnataka and Tamil Nadu ended up rioting over shared access to water, resulting in burning trucks identified as coming from the other state. Water rights are hotly contested not just in developing nations, but in the West as well. In California, which is a experiencing its worst drought in 1200 years, water rights have farmers fighting with cities. Orange groves, almond farms and avocados are all water thirsty crops that compete with other local needs for water.

The price of Almonds has continued to climb for years as water needs have made the crop more expensive

In the last few years issues around water have revolved around cities facing water shortages, most notably in Cape Town, South Africa, which got dangerously close to “day zero”, at which point the city would be officially out of water. Though rains finally returned before a full-blown crisis emerged, citizens of Cape Town spent months operating under water rationing while wealthier citizens paid for water to be delivered from other cities. Farmers were simply denied water for their crops, until finally they received a normal amount of rain for the rainy season (the first in four years).

But the ability to prioritize domestic and urban water concerns depends on a global order that is robust and sufficiently engaged to head off water conflicts between nations before they become more dangerous. But that world is eroding and with it the order that constrains nations.

It should not be a surprise that the decline of American global leadership coincides with increasing global tensions. India and China, having already fought one war, are currently engaged in ongoing military standoffs. Despite only sharing a few borders in largely remote places (in Jammu and Kashmir there exists only a frontier between China and India and there have been regular skirmishes in the past) Chinese and Indian military patrols regularly run into each other. Due to a treaty previously signed soldiers on either side are prevented from using guns to avoid escalation when two patrols meet (leading to some hilarious recounting of soldiers yelling, throwing punches and hurling rocks), but recently the response has been an increasing build up of military presence by both nations forcing an official diplomatic responses. The issue is not that China and India are about to go to war, but that the potential for war is increasing.

Far from heading into a period of increasing prosperity and international cooperation; something practically essential for tackling climate change, terrorism or pandemics, the global order is failing. Even before the age of Donald Trump and populist nativism it took enormous effort to corral nations into agreeing to restrictions on water use. The 1997 UN Convention on the Law of Non-Navigational Uses of International Watercourses, which aimed at establishing “equitable and reasonable use” of shared water systems and prohibited nations from using water access to impose significant harm on another state only ever had sixteen nations agree to it. In the current climate it is unlikely that any new nations would even consider such a binding restriction.

The 21st century continues to throw new challenges at a global order that seems, at best, sclerotic. That breakdown in the international order is putting new risks on the table, leaving countries, sub-sovereign states, cities and farmers to fight their battles with less support, and more vulnerable to actors with military or diplomatic muscle to flex. China is one such nation that has a great deal of its future connected to the control of water, both through access to waterways in the South China Seas, and to the very water that irrigates crops and powers industry to its neighbours. A resource so precious and important deserves a great deal more attention than its currently getting.

June 12, 2020June 12, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Who Will We Hold Accountable?

June is here and the summer promises to be hot, sunny and inviting. Yet Canadians are still struggling with the pandemic, with daily numbers still in the 100s of new cases and the curve being bent slowly. Far from crushing the pandemic or setting up a robust testing and tracing system Canadians are being reprimanded for being to close to each other in parks and watching the mayor of Toronto walk around incapable of wearing a mask properly.

These results are not nationally representative, but regionally specific. Quebec is currently the worst affected province, with Montreal the country’s epicentre for the virus. Ontario fairs only a little better, while the rest of the country is beginning to move to reopening. In all, while Canada largely sidestepped an out of control spike, we have failed to bring the virus under control.

Fighting the pandemic has taken an enormous financial and emotional toll, to citizens, to cities, and to the economy. Economic lifeboats to offset the worst of the effects have cost in the hundreds of billions and will represent a sizeable financial burden for the foreseeable future. That cost has been born willingly, with people foregoing seeing relatives and friends, risking the survival of businesses, and saying goodbye to loved ones who died in hospital alone, all in an effort to smother a new and existential threat to our well being.

But Canadians will be right to wonder whether our governments maximized our response and put our consent to be governed to good use, or did they squander it in bizarre and foolish ways? I’m sorry to say that it’s probably the latter.

Cast your mind back to March (roughly 100 years ago) and recall that the minister of health, Patty Hajdu had insisted that the coronavirus posed a minimal risk to Canadians. Questions about whether we should be wearing masks were dismissed as misguided and the idea that closing borders to people travelling to places that had been Covid-19 hotspots was considered useless or potentially even discriminatory.

What an innocent time.

Today masks are recommended (sort of) albeit reluctantly, borders are largely closed and social distancing is not simply a recommendation, but mandatory and enforced by private businesses. Concerns about racism have been buried under a growing mountain of evidence that China actively misled the world about the severity of the new epidemic while simultaneously buying as much personal protective equipment as it could.

Given the conceivable difficulty with getting people to “socially distance” responsibly, something that people have never done in a society accustomed to largely doing what it likes with little fear from its government, the political opposition to masks has remained particularly puzzling. What has struck people as one of the most simple and straightforward ways to improve safety by embracing an obvious form of precaution has been regularly opposed by every public health official for all kinds of reasons right up to the moment that they decided that it was a good idea.

Other concerns about our government’s handling of the pandemic seem even worse. Though Ontario and Canada at large were meant to be better prepared as a result of the SARS outbreak, at every turn it seems that its quite the opposite. The national stockpile turns out to not have been much of a stockpile at all. Ontario’s own stockpile was largely destroyed in 2013 when it was supposed to expire and not replaced at the time (in a cruel twist of irony that expiry date was revealed to likely have been too early). In a recent interview, when Dr. Theresa Tam was asked whether concerns over pandemic preparedness had been presented to the cabinet she was cut off by the Minister of Health and reminded that all conversations with the cabinet are private.

The only thing that might have made up for all these missteps would have been an effective test and trace system that would have over-tested the population so that it could get out ahead of the virus and proactively isolated carriers. By comparison testing remains well below where it needs to be to accomplish this. In fact, to get a clear sense of just how far behind we are on the testing consider that in Ethiopia (ETHIOPIA!) the capital is testing people door-to-door! Meanwhile, here in Toronto it’s unclear whether you should even go in for testing or just stay home.

This isn’t a political rant. I’m under no illusions that another party or another leader might have made better or more decisive decisions. If anything multiple parties are to blame for the failed efforts to deal with the pandemic at every level of government. If I needed to find a single example that encapsulated the level of this failure, please consider that last week the Toronto Star reported that the TTC was trying to find out if they could legally enforce wearing masks on buses and subways! Months after a pandemic has ravaged people’s lives and eroded billions in wealth, only now does the TTC aim to see if it can enforce the most basic form of prevention for buses and subways. Even a cursory glance at where most of Toronto’s cases have been are aligned with poorer neighbourhoods that depend on more public transit.

These questions aren’t academic, and they aren’t partisan. The stakes are very real and the crisis will have a long reach into the future. Canadians have spent the last decade acquiring sizeable debt anchored by home values, with governments and banks happy to pretend that this debt was a form of wealth. Today the financial situation looks considerably worse, and one way to mitigate the damage to the economy would be to reopen the economy with confidence. Sadly, in the hands of our existing political class, such a thing remains out of reach.

June 5, 2020June 5, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Watching the Crisis Unfold in Real Time

Housing Crisis 2

The economic fallout of the pandemic has garnered many shocking headlines, from concerns over how many restaurants may fail to the sheer number of people seeking unemployment insurance. Some of this is economic rubber necking, basking in the shocking and outlandish statistics generated by the lockdown and pandemic. The real test is still in front of us, determining what is temporary and what is permanent.

up-unemployment-claims-estimates-promo-1585760380714-superJumbo — From the New York Times

Concern that a number of restaurants may not reopen seems a reasonable fear, since lots of restaurants don’t survive normally. The impact to the airline industry will take years to work out, since you can’t just put all those planes back in the sky. It will take time to determine which routes should be brought back first, how many people want to fly and the planes themselves will need considerable maintenance before any of them roll down a runway.

But hope springs eternal. Eight weeks into the lockdown and efforts remain underway to gradually reopen the economy, and in time we will see which parts of our society (not economy, but society) need real help to get back on its feet.

I remain largely optimistic about the speed of the recovery once it’s safe to reopen, but remain cautious regarding existing problems within the Canadian economy that the pandemic will likely accelerate. Problems that were hidden just under the surface will find themselves in the cold light of day, and those problems will have repercussions, many of which will not be easy to predict.

As I wrote back in March (Will Covid-19 Make Real Estate Sick?)

“Problems rarely exist in isolation, and a problem’s ability to fester, grow and become malignant to the health of the wider body requires an interconnected set of resources to allow its most pernicious aspects to be deferred. In Canada the problem has been long known about, a high level of personal debt that has grown unabated since we missed the worst of 2008. What has allowed this problem to become wide ranging is a banking system more than happy to continue to finance home ownership, a real estate industry convinced that real estate can not fail, and a political class that has been prepared to look the other way on multiple issues including short term rental accommodation, in favour of rising property values to offset stagnant wages”

The issue of debt, real estate and short-term accommodations may be one issue undergoing a seismic shift in real time. The website MLS paints a surprisingly changed picture of the rental situation in downtown Toronto. Condominiums like the Ice Condos, located at the bottom of York Street were written about last year because so many of the units were being used for Airbnb. Today they offer hundreds of long-term rentals. The story is not limited to a few buildings either, much of the downtown condo scene, once reserved for Airbnb customers, has suddenly opened to long term accommodation.

Condo Rentals — A snapshot of available rental in May 2020 in downtown Toronto

For a city that only a few months ago was running perpetually short of rentals this change has been rapid, but its fair to assume that many of these landlords are hoping that the crisis will pass and that things will return to normal, with lucrative business in short term rentals resuming. The effect of all these new rentals is not happening in a vacuum. According to Rentals.ca in their May 2020 report, the price of condo rentals in locations like the Ice Condos have dropped by 10%.

The flip side of the real time change has been the sudden collapse in real estate sales. Reportedly year over year housing sales have dropped in Toronto by 67%, and new listing are down 64%. The selling and buying of houses has simply come to a grinding halt, and with it much of the city’s revenue from the land transfer tax, creating a secondary crisis within cities that have depended on the land transfer tax for revenue growth. In a cruel twist on a well-intentioned effort to get government finances under control, Toronto isn’t allowed to run a deficit, a constraint that has turned into a fatal weakness under the pandemic.

It is here that we should stop and consider a reality. In a few short weeks two major sectors of the Canadian economy within the city of Toronto (and Vancouver for that matter) have been radically altered. But this is also a period where we have seen the most government support and extensive economic intervention. Long term expectations have yet to shift. Airbnb hosts wish to remain Airbnb hosts. Homeowners hope to continue to use their houses to expand their financial footprint. But we should take a page from the city of Toronto reviewing its financial books, the real crisis has yet to truly unfold.

Our future contains, but has yet to have pass, the retreat of government financial support. It has yet to put people back to work, yet to reopen universities, yet to ramp up our manufacturing base, yet to know much of anything about moving past Covid-19. Clarity about what governments should or should not do are hindered by China’s resistance to openness and transparency, while other nations that have already faced the pandemic and seemed to recover are running into second waves. There is no clarity about the future.

iStock-518182156 (1) (1) Real estate remains at the heart of the Canadian economic story for the last 20 years. Appreciating housing prices are the chief source for growth in Canadian families’ net worth. Borrowing to buy houses and borrowing against home equity remain our chief sources of debt. Our politics revolves around the tension of needing more housing in certain highly desirable areas while preserving those areas from over development. That dynamic has revolved around a status quo that seemed to have no conceivable end. The pandemic may have radically altered the Canadian real estate landscape regardless of how people feel about it or what they want. Whether we can walk back changes of this magnitude remains very much unknowable. For now we can only watch the changes our society and economy are undergoing and hope that what we are witnessing will be for the best, those changes that have happened, and those yet to come.

May 14, 2020May 15, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Journal of a Plague Year – In Defense of the Lockdown

Plague Year

While curves continue to be bent and geopolitics continues to become both more silly and more frightening than anyone ever thought possible, populations of countries remain unsure and troubled about whether they have made the correct choice of trying to beat COVID-19 through lockdowns and aggressive social distancing. Predictions of economic doom run rampant, ranging from serious recessions to the potential for a depression not unlike that of the 1930s.

With nothing to do but sit at home and twiddle our thumbs, either letting our house fall into total chaos or be cleaner than ever (a battle largely determined by how tired I am and how many cookies my kids have had) making predictions and considering alternative paths to beating this virus occupy considerable mental space. How will we know whether the unprecedented steps we have taken were the correct steps to take? What dark and strange future awaits us on the other side? I’m here to put your mind at ease, both because this situation is not unprecedented, and because we may not have had any other choice.

Let’s start with precedent. In an interview with Australian talk show host John Anderson, historian Niall Ferguson mused that future historians would regard our response to the pandemic as a mistake. This is an understandable position given the continued uncertainty around much of the virus. Is it very dangerous? Does it only affect the elderly? Do we even know how many people have it? Undoubtedly the biggest threat from the virus is what we don’t know about it.

But the assumption that it is the lockdown that is hindering the economy are belied by the available evidence. For instance, Sweden has been a focus through much of this since it hasn’t locked down its economy fully. Though schools have been closed and people have been advised to socially distance, restaurants and bars have been allowed to remain open. But estimates are that business has dropped off dramatically. In fact, despite having more of their economy not under lock and key does not seem to have materially changed the country’s fate, with early economic predictions of the contractions expected to be around 7% of GDP. That’s in line with other European neighbors.

In a similar story, the state of Georgia’s efforts to open early were met with disappointing results. People, worried about a virus that has a surprising amount of variability and high level of infection simply don’t want to go axe throwing, drink in crowded bars and go bowling. With the virus still being prevalent the thing restricting economic activity is not the lockdown, it is the virus.

Much is being made of the 1918 Spanish Influenza and this is an understandable place to jump to; the last memorable global pandemic that seriously interrupted the lives of people. Economists studying that event have concluded that “cities that implemented early and extensive non pharmaceutical interventions (like physical distancing and forbidding large gatherings) suffered no adverse economic effects over the medium term. On the contrary, cities that intervened earlier and more aggressively experienced a relative increase in real economic activity after the pandemic subsided.” Other lessons drawn from the 1918 pandemic were not to give up too early on restrictions and that a multi-layered approach was what worked best.

But precedent exists much farther back. In Daniel Defoe’s work “Memories of a Plague Year”, a book once thought to be a work of fiction, but now believed to be based on the diaries of Defoe’s uncle who lived through the last great plague in London of 1665, all the hallmarks of our modern response can be found in that bygone era. Wealthier people escaping to their cottages? From Defoe: “It is true, a vast many people fled, as I have observed, yet they were chiefly from the West End of the Town; and from that we call the Heart of the City, that is to say, among the wealthiest of the people.”

220px-Great_plague_of_london-1665

How about our daily obsession to see if the curve is “being bent” and watching the infection rates? In 1665 concern over the spread of the plague (called the distemper) caused people to look “towards the east end of town; and the weekly Bills showing the Increase of Burials in St. Giles’s Parish…the usual number of burials in a week, in the parishes of St Giles’s in the fields, and St. Andrew’s Holborn, were from 12 to 17 or 19 each, few more or less; but from the time that the Plague first began in St. Giles’s parish, it was observed that the ordinary burials increased in number considerably.”

What of economic activity? It has been estimated that somewhere between 25%-30% of the economy has been restricted, but in 1665 “All Master Workmen in Manufactures; especially such as belonged to Ornament, and the less necessary parts of the people’s dress, cloths, and furniture for houses; such as Riband Weavers, and other Weavers; Gold and Silverlace-makers, and…Seemstresses, Milleners, Shoemakers, Hat-makers and Glove Makers: also Upholserers, Joiners, Cabinet-Makers, Looking Glass Makers; and innumerable trades which depend upon such as these; I say the Master Workmen in such , stopped their work, dismissed their journeymen and workmen, and all their dependents.” You get the idea. The economy shut down.

source

Worried that people believe lunatic conspiracies, burning 5G towers across the world? Conspiracies depend on context, and in 1665 there were plenty of people pushing nonsense ideas, including astrologers spinning stories, and a host of charlatans that were “a worse sort of deceivers…for these petty thieves only deluded them to pick their pockets, and get their money; in which their wickedness, whatever it was, lay chiefly on the side of the deceiver’s deceiving, not upon the deceived.” Amulets, charms and potions, signs of the zodiac and any number of other bogus ways to defend the person from the plague were sold widely to a gullible public desperate for protection.

Great Leveler But what of the predictions we keep hearing about? That life will be forever changed by the events we’re living through? While I have a great deal more to say about the nature of prognostication, I’ll keep my comments here brief. In general history shows that humans don’t tend towards radical changes following big, but temporary upheavals. Instead, crises like the one we are living through emphasize existing weaknesses within the society.

In his book “The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty First Century”, author Walter Scheidel points out that during the first big years of the plague, which came in the 1300s, the high death rates from plague changed the existing relationship between land and labour. For a society of feudal serfs this meant that serfs could demand wages from their lords, and the lords felt compelled to pay lest their lands remain fallow. Behaviours changed too, but only in as much that hedonism and charity increased to match the scale of the devastation people were living through. In response to our own situation charity, certainly that sanctioned by the government, has been widespread. Whether we might count the volume of baking as a form of hedonism will be left to others to decide.

Wages & Covid

But we should largely discount predictions of an economy collapsing and a society that will not wish to do anything ever again. Cruise ships, house sales, air traffic and eating out will return as confidence returns, though there will be losses along the way. But the real damage to the economy, and the people within it, will likely remain along lines that have already been established. As fewer Canadians work in good manufacturing jobs and more work in the service sector, earning marginal wages, they will continue to take the brunt of the economic hit of the lockdown. Just as likely will be that efforts to decouple production from China will lead to greater automation in manufacturing. In other words, more of the ingredients at the heart of the widening inequality gap.

The response to the coronavirus feels novel, to us. But in the scheme of history there doesn’t seem to be many other viable options. Life will return to normal not when the lockdowns are lifted, but when the virus is gone. But if we’re going to do something with our time it would be better spent figuring out how we’re going to address a worsening crisis of inequality, or brace ourselves for the next round of populist agitation.

Black Death 1

May 4, 2020May 14, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

On The Potential Elastic Energy of Deceased Cats in Free-fall

Dead Cat

What is the “Dead Cat Bounce”? If you’ve been following the news you’ve probably heard the saying and it has become fairly common among financial professionals to describe the current market in such terms. So what is it?

The phrase has its origins on Wall Street, in that “even a dead cat, dropped from a sufficient height, will bounce.” Charming. But it describes the very real experience of stock markets having a brief but substantial recovery before resuming a fall. The effect is brought on by buyers reentering the market having assumed that a bottom has been reached and encourages others to begin piling in before another sell-off begins. The dead cat bounce is the shadow of hope over an otherwise dire situation that has not yet been fully realized.

As such many have called the current market rally a “dead cat bounce” based on previous experience of other bear markets. The expectation being that this is merely a brief respite before we head into even deeper losses. On March 30^th, the website Market Watch asked “Is this a dead-cat bounce or the bottom investors have been waiting for?”. On April 15^th Forbes reported “Don’t Be Fooled By The Markets 24% Dead Cat Bounce” and on April 20^th the New York Times ran “Can Investors Trust the Stock Market Rally?”.

So what can you do with this new knowledge? Almost nothing.

As that Market Watch article points out, it is hindsight that indicates a “dead-cat” and it is not a predictive asset. Looking at the bear market of the early 2000s there were a number of rallies, some lasting for half a year. Some rallies were indistinguishable from the general volatility of the market and seemed like neither a correction or a rally. Similarly, in 2008 there were a number of rallies before the market finally bottomed and began its long march back (see charts below). Importantly these periods of rebound, while followed by another dip, didn’t hurt investors in the long run. Had you invested in any of the bounces none of the subsequent downturns proved permanent to the long-term investor.

2000 downturn

So if the “dead-cat” isn’t a useful predictor, either of time, recovery or depth of the next fall, why is it so ubiquitous? The answer is because it is a non-position, a place holder until something more tangible can be grasped and a way of saying that you don’t know what’s going to happen framed like you do. Just as most predictions at the beginning of the year were for a moderately positive year in market returns, today people are making a claim that markets that go up may also go down, a decidedly underwhelming statement about the nature of market performance.

If there is a benefit to the proclamations of a dead cat bounce it is to advice caution to investors, waving them off getting too excited about positive market volatility in periods of extreme danger. Would it be wise to rush into a market showing a tentative recovery, buying every highly risky investment on the chance we’d hit bottom? The answer is clearly no. The warning of the bounce provides a mental check on how fast we should proceed and reminds investors to reconsider worst case scenarios.

Lastly, the dead-cat reflects a bias towards how we understand current conditions. This form of bias isn’t isolated to the financial markets. In the business of predicting weather there is something called a “wet bias” by companies like Accuweather and The Weather Network. If there is a 5% chance of rain, weather forecasters are likely to say its 20%, hedging their prediction. If the chance of rain is 50%, they will likely round up to 60% since 50% is considered less accurate by the public. In other words, the accuracy of the prediction is less valuable than how accurate the prediction feels.

This makes sense. If someone goes on TV today to argue that the recovery will be swift, that the economy will be unscathed, and that we will put this whole ordeal behind us with little societal memory this sounds inaccurate, like a prediction completely detached from reality. Arguing that we are in a “dead cat” style rally is plausible, a sensible take on the current situation that gives the illusion that aspects of this unprecedented situation have precedent and can be known.

We can conclude that the dead-cat bounce is a kind of shorthand that serves as both a warning and an explanation. That doesn’t mean it doesn’t have value, but it is a little short on providing guidance. Instead I advise that people who wish to get back into the market consider the following things.

Do you need the money? If you were fortunate to have cash on hand when markets began falling, and can deploy that money today, do you need it? If you are hoping to invest money that is technically ear marked for spending in the near future, think twice about how you would fair without it.
How risky is it? Let’s say you want to buy a blue-chip dividend paying company, a theoretically conservative investment, how well did it perform when markets fell? Did it perform better than the average market return, or was it relatively in line with it? The safety of stocks may be largely illusionary when markets sell off.
Are you building on your financial plan, or abandoning it? Stocks at a discount may represent an opportunity to better round out your portfolio in aid of your financial goals, but if it weren’t for the sudden discount on the value of the company would it have still made sense for your portfolio?
Will you be comfortable with a short-term loss? Just as you would hope that markets continue to recover, its important to consider the possibility that markets will indeed retreat and with it so will the value of your new investments. Can you live with an immediate drop between 10% to 20%? If this is early in the bear market, could you ride out multiple potential drops of up to 20% each time?

The dead-cat bounce is part of the lingua franca of the investing world, but it explains very little and doesn’t really provide advice. Whether you want to get back into the markets, or are fearful of doing so, the same due-diligence and questions about comfort of risk still apply. If you can answer those questions you should be able to benefit from the market volatility of bad markets.

May 1, 2020May 7, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Who Is Most Endangered by Negative Oil?

Negative Oil

In a year filled with random and unexpected events, hopefully not likely to be repeated anytime soon, the price of oil going negative may stand out as a particularly unusual one. People are familiar with the idea of investments suffering losses and posting negative returns, but for an investment to be negative, to literally be worth less than zero is unique in our history.

All this, we may say, has been precipitated by an oil war being fought between Russia and Saudi Arabia, made worse by a pandemic that has slashed global demand by 30% and the cumulative effect of a global shift in oil production over the last decade that turned America into the world’s largest producer of oil. We may also assume that the worst hit in this mess are the oil producers themselves.

Oil Producers

Certainly in Canada it is easy to assume that it is Canadian producers most at risk from the collapse in oil prices, already suffering trying to get their oil to market more efficiently and cheaply than by train. But while the collapse in oil prices is indeed a headwind for producers, they are not the most at risk at being hurt by the volatility in oil’s spot price.

No, the one most at risk is you, the average investor.

It is important to remember that “financial services” are exactly that, retail products in the financial space. Products that you invest in may reflect a real need by investors, but they also reflect demand. As such it shouldn’t be surprising to discover that products exist that are not needed but are wanted. If someone thinks they can make money providing a vehicle of investment it will likely find its way to the market, for good or ill.

Exchange Traded Funds, the popular low-cost model of investing that has become very common, is where all kinds of investments like this appear. Reportedly there are something like 500 different ETFs in Canada alone. All this variety is good for the consumer, but maybe not for the citizen merely trying to save for their retirement.

Let’s turn our attention back to oil and to fate of investors that, having sensed that the price of oil was so low, they considered investing in the commodity was a “no lose” scenario. In the week before the price of West Texas Intermediate (WTI) went negative, investors put $1.6 billion into the United States Oil Fund LP (USO ETF). USO was one of a handful of investments that allows investors to try and invest in the actual commodity of oil and skip investing in an oil producing company.

Oil Price

What many of those investors likely didn’t realize is that to get close to the price of oil you have to buy oil contracts that expire very soon. USO did this by holding contracts that mature within the month and then roll those contracts to new contracts for the following month, and so on. This keeps USO’s price and performance close to the spot price (the price the oil is trading for at that moment). But it also means that USO must sell those contracts it holds onto other buyers every month or it risks having to take physical delivery of the oil it holds the contracts for.

The problem should become self-evident. As the May month end contract was approaching, and with oil prices low and storage at a minimum, oil buyers didn’t want USO’s contracts, and USO couldn’t physically receive the shipment of the oil. It had to get rid of the contracts at any price, and that’s just what they did, paying buyers to take the oil contracts off their hands.

ETFs, Mutual Funds and a host of other investments make it seem as though investing has few barriers, with ease of access making experts of us all. But that isn’t the case. The unique qualities of a product, the mechanics of how some investments work and ignorance about the history of a market sector can spell danger for novice investors that assume markets are simple. In Canada there are only a few investments that deal directly in the commodity of oil; the Auspice Canadian Crude Oil ETF (due to be closed May 22 of this year), the Horizon BetaPro Crude Oil Daily Bear and Daily Bull ETFs (HOD and HOU respectively, both of which may have to liquidate. Horizon ETFs have advised investors NOT TO BUY THEIR OWN ETFS!) and lastly the Horizon’s Crude Oil ETF, which uses a single winter contract to reduce risk but will radically alter the performance compared to the spot price.

Many investments are not what they seem, maintaining a superficial exterior of simplicity that masks the realities of a sector or structure that can be a great deal riskier than an investor expects. In 2018 investors that had purchased ETFs that traded the inverse of the VIX (a “fear gage” that tracks investors sentiment about the market) suffered huge losses when the Dow Jones had its (then) largest one day drop ever, wiping out 80% of the value of some of these investments. Then, like now, investors had a poor understanding of what they owned and were easily blindsided by events they considered unlikely.

As I’m writing this I see reports out that suggest the price of oil could once again go negative. Whether they do or not is irrelevant. It is enough to know that they can and that investors will have little defence against a poorly constructed product that has the ability to go to zero. Before last week the USO ETF owned 25% of the outstanding volume of May’s WTI contracts. That was a concentration of risk that its investors just didn’t realize or understand. Today its clear just how dangerous that investment was. Investors owe it to themselves to get some real advice on what they invest in, and make sure those investments fit into their risk profile and investment goals.

April 29, 2020May 7, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

A Future Filled With Seniors, A Risk Yet Considered

*From Adrian: I began writing this on the weekend when I first learned of the conditions of the retirement residence in Dorval. Since then it has been revealed that nearly 50% of COVID-19 deaths in Canada are in long term care facilities. You can read more about that here from The Globe And Mail: Outbreak at senior’s homes linked…

Senior's Risk

Canada’s demographic story is neither unique nor surprising. Like many other nations (most nations in fact) its largest demographic is rapidly aging and requiring an increasing number of services in both health care and assisted/retirement living. Like many other nations its only population growth is through immigration as people have largely stopped having enough kids to grow the next generation. It is a slow moving story, but also an inevitable one.

This is both well known and uncontroversial. Long before John Ibbitson and Darrell Bricker had written Empty Planet, before Hans Rosling was using a clever moving chart at TED Talks to explain population trends, Canadian professor David K. Foot had written his book Boom Bust and Echo, detailing the future of the Canadian population. Finally those predictions are starting to be realised, and investors like myself are eagerly looking for ways to capitalize on an enormous demographic change.

One such way will be in Senior’s Residences, Assisted Living and Long Term Care Facilities. With Canadians living longer Statistics Canada points out that 7.1% of Canadians over 65 live in “collective dwellings” like retirement residences, a number that jumps to 31.1% for people 85 and older. That number holds true when we look at special care facilities, with 29.6% of people 85 and over.

Senior Demographics

The logic is appealing and direct. In 2016 16.9% of Canadian were 65 or older, and 2.2% were 85 or older. That was a 20% increase since 2011. With more Canadians approaching 65 and 85 than ever before the need for retirement residences, assisted living and long term care facilities will be greater than ever. Given the time it takes to secure and build new facilities, resistance at local levels to having them built and the high costs of creating and managing these businesses plus the government oversight, the business is as close to a sure thing that investors could hope to find. How could this go wrong?

I’ve been writing about demographics for a while. Here are some of the other things I’ve had to say:

The OHIP Gambit (October 23, 2015) – How an aging population will likely impact the province’s finances and imperil our health care.

The Demographic Deformation (October 9, 2015) – Lots of old people means an outsized impact on financial markets.

4 Reasons Why Planning for Retirement is Getting Harder (October 22, 2014) – People living longer means planning for longer with more uncertainty. Here’s four things impacting that planning.

Is It Time To End The “Senior” Citizen (April 27, 2015) – Being a senior comes with lots of perks, but increasingly meaningless when you’re likely to be a senior for two decades.

Enter 2020, a year that continues to feel like being slapped in the face by a large fish. Investors are accustomed to thinking very little about the business practices and oversight of the companies they invest in, but perhaps that should change, especially when they invest directly. Scandals, abuse and personal harm are matters for owners, and owners, even if removed from the daily running of a business should remain engaged. This remains especially true if the business deals in the wellness of people.

To my point, behold the unfolding scandal at a privately run senior’s residence in Montreal. I apologize at how graphic these details are and if you are at all squeamish please feel free to jump to the next paragraph. When health officials were finally called into the residence it was described as a “concentration camp”. Some residents had fallen on the floor and been left there. Others hadn’t been fed. Two people were found dead in their beds and hadn’t been recognized as such. Reportedly there were only two orderlies for the entire 134 bed facility. Some patients were so dehydrated they were unable to speak. Patients had been left in diapers, unchanged for several days. One in triple diapers with feces leaking out. These details are beyond horrific and have no place in a story about a Canadian senior’s residence. In total there had been 31 deaths over the previous few weeks.

As an investor, what should you think about such a discovery? Beyond its horror show details, more suited to a zombie apocalypse movie than real life, how should a lone investor think about their role in this?

One thing to consider is that due diligence should begin to increase the more certain an investment looks. Businesses with very high barriers to entry (the ease or difficulty of getting involved in a sector of the market), that are part of effective oligopolies or are essential services are not “set it and forget it” services. If anything the risk of abuse, neglect or corruption is higher the more essential and irreplaceable the businesses becomes. For the average person at home this may not be a feasible or realistic thing to do, and an individual investor may not be in a position to attend annual general meetings, or even be aware of how to solicit and get answers from corporate boards.

This is one reason to consider using a mutual fund, or an investment that functions like a mutual fund that dedicates energy to analyzing and understanding businesses. It is also a reason for investors working with a financial advisor to ask questions about the nature of the investments they are buying, especially if they seem like “no lose” scenarios. If something makes intuitive sense to do, we should be clear as to why more aren’t doing it. Lastly, if you are investing in a private investment sold through an offering memorandum you should make sure someone is paying close attention to the details. There will always be blind corners in businesses, things you can not know, but you should have comfort that someone is providing verifiable oversight.

An aging population creates new investment opportunities, and senior’s living will be one of them. A business that’s cash rich and necessary, the appeal is obvious. But businesses that are responsible for providing care and looking after people’s well being also have the pull to maximize their profits, squeezing returns wherever they can. That push and pull should sit on everyone’s mind as they consider the new opportunities coming into focus.

April 16, 2020May 7, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

COVID-19 & Canadian Financial Health

The future for Canadians will not be one that is free of crises. Pandemics, financial collapses and acts of God continue to lurk around every corner. But the biggest danger is how Canadians have mismanaged their finances and how vulnerable that makes them when the unexpected happens. Today I’m ranting about what comes next, and how our physical health may be more closely tied to our financial health.

April 15, 2020May 7, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc