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.

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 ACPI.

 

If I were the minister of Middle-Class Prosperity

Save the Middle Class

Launched to much derision and the collective snort of Canada’s journalist class, the government introduced a new cabinet position, “Minister of Middle-Class Prosperity”. Shockingly the new minister seemed incapable of defining what the middle class actually is, and in an effort to clarify her earlier non-position, went on TV to describe understanding the middle class as different things to different people that needs to be viewed through different lenses.

This answer, such as it was, was uniquely terrible since any applied thought to the question of “middle class prosperity” should yield several interesting ideas that deserve close examination.

For instance, an office focused on middle class prosperity might provide a useful take on inflation in terms of how it affects the middle class. Rather than relying on the aggregate rate that economists talk about at national levels, some clarity might come in about where that inflation is felt, like in housing, child rearing and education. We might also find something useful to say about savings and retirement, both of which are going to be increasingly serious questions into the very near future.

But let’s start with the basics. What is a middle class? First, the middle class is a result of an industrialized society. Though there is evidence of times of improving and deteriorating living conditions for humans in our pre-industrialized past, sustained and persistent improvements in living standards exist as a result of industrialization. This is not just because people got richer (and skills became more specialized) but because the cost of things dropped.

This really picked up steam after the Second World War when Western nations went toe to toe with Soviet command economies and showed, despite all their inequality, that more prosperity for more people came about as a result greater innovation in production in the pursuit of reducing prices. Yes, many people had good jobs, but luxury items like refrigerators, dishwashers, and microwaves all became standard kitchen appliances, as did (in time) TVs, cell phones and computers because prices for those items have been in free fall since the 1950s.

Historical and Predicted Prices

If we are looking for a definition of the middle class we could do worse than something along these lines: “The middle class represents a working sector of our society that is sufficiently monetarily rewarded to save for future financial stability, retains ample discretionary income in the present, and can reasonably aspire to help their future generations.” Threats to the middle class, both to people trying to enter it and to those trying to maintain their status within it, come from the erosion of the cost effectiveness of certain services. Housing, education and long retirements threaten this class of people and some of their ills are obscured by how we understand and talk about the economy.

Consider for instance why we talk so much about taxes. Taxes represent one of the few and very clear levers that a government can pull to change personal finances. They can take less money, or they can take more. As of this week the Liberal government has promised another “middle class tax cut” that should leave an average middle class Canadian $300 richer every year, or $600 for a family. Not bad, and for an individual that works out to being 25% of one month’s rent in Toronto for a single bedroom (average) or three weeks of groceries for the average Canadian family! If you are struggling as a Canadian family despite two good jobs, its hard to imagine that this will make or break a retirement or fund a university tuition.

In a survey done by BDO, 2047 Canadians were asked about their personal finances. The results were less than encouraging. 57% were carrying credit card debt and a third couldn’t pay off their short-term credit. 39% said they had no savings for retirement and 69% said they didn’t have enough savings to get through retirement. These findings match repeated surveys and studies done over the past decade that continue to suggest that Canadians are simply not saving enough and are drowning in debt.

Debt Issues

Small tax cuts seem unlikely to fix problems that look like this, and I think its important to note that solutions to these problems are not readily apparent. It should also be noted that being middle class should not mean that you are always financially whole and never struggle. Part of the reason that the middle class has financial issues is because it strives for a life above mere subsistence. Its goals are materially aspirational, and people live their lives according to that aspiration.

A more productive focus should be on helping people enter the middle class. Far too much energy has been dedicated to using houses to boost middle class wealth, both through restricting development to preserve neighbourhoods, and relying on the equity within homes to boost standards of living. This is the wrong place to hoard wealth and it should be replaced with more aggressive home development within cities to boost density, improve services, and reduce the price of homes. Just as importantly the role of higher education should go under a microscope. The costs of University have jumped as more Canadians get degrees and those degrees are worth less in the market. Canadian parents regularly save for children’s education, to the detriment of their retirement savings. The cost of that education is expected to be over $120,000 for a four year degree very soon. Attacking the issue of education head-on would be an enormous help in easing access to middle class security.

Lastly, dealing with debt should be a priority. Lending should have tighter restrictions, especially for younger Canadians in their early 20s when their financial needs are lower, and a state run bank set up to help Canadians get out of debt (the use of which should preclude any other financial lending) would be an enormous asset in terms of allowing Canadians get on going debt help and learn to better manage budgets and connect people to financial help.

Far from having little idea of what constitutes the middle class, we are, if anything, too certain of what a middle-class life looks like and the path to getting there. This is a moment when we should be experimenting with how we create a growing middle class, not calcifying a particular version of life that no longer fits a world that has dramatically changed since the 1950s. A minister for “Middle Class Prosperity” need not be a pointless fluff position making vague pronouncements. Instead it could be a cabinet position that spearheads exciting new ways to improve access to financial security and create paths to long term growth.

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 ACPI.

Making Economics Meaningful – How Official Inflation Figures Obscure Reality

Since 2008 (that evergreen financial milestone) central banks have tried to stimulate economies by keeping borrowing rates extremely low. The idea was that people and corporations would be encouraged to borrow and spend money since the cost of that borrowing would be so cheap. This would eventually stimulate the economy through growth, help people get back to work and ultimately lead to inflation as shortages of workers began to demand more salary and there was less “slack” in the economy.

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Following the financial crisis lending rates dropped from historic norms of around 5% to historic lows and remained there for most of the next decade.

Such a policy only makes sense so long as you know when to turn it off, the sign of which has been an elusive 2% inflation target. Despite historically low borrowing rates inflation has remained subdued. Even with falling unemployment numbers and solid economic growth inflation has remained finicky. The reasons for this vary. In some instances statistics like low unemployment don’t capture people who have dropped out of the employment market, but decide to return after a prolonged absence. In other instances wage inflation has stayed low, with well-paying manufacturing jobs being replaced by full-time retail jobs. The economy grows, and people are employed, but earnings remain below their previous highs.

Recently this seems to have started to change. In 2017 the Federal Reserve in the United States (the Fed) and the Bank of Canada (BoC) both raised rates. And while at the beginning of this year the Fed didn’t raise rates, expectations are that a rate hike is still in the works. In fact the recent (and historic) market drops were prompted by fears that inflation numbers were rising faster than anticipated and that interest rates might have to rise much more quickly than previously thought. Raising rates is thought to slow the amount of money coursing through the economy and thus slow economic growth and subsequently inflation. But what is inflation? How is it measured?

One key metric for inflation is the CPI, or Consumer Price Index. That index tracks changes in the price or around 80,000 goods in a “basket”. The goods represent 180 categories and fall into 8 major groupings. CPI is complicated by Core CPI, which is like the CPI but excludes things like mortgage rates, food and gas prices. This is because those categories are subject to more short-term price fluctuation and can make the entire statistic seem more volatile than it really is.

CollegeInflationArmed with that info you might feel like the whole project makes sense. In reality, there are lots of questions about inflation that should concern every Canadian. Consider the associated chart from the American Enterprise Institute. Between 1996 – 2016 prices on things like TVs, Cellphones and household furniture all dropped in price. By comparison education, childcare, food, and housing all rose in price. In the case of education, the price was dramatic.

Canada’s much discussed but seemingly impervious housing bubble shows a similar story. The price of housing vs income and compared to rent has ballooned in Canada dramatically between 1990 to 2015, while the 2008 crash radically readjusted the US market in that space.

The chart below, from Scotiabank Economics, shows the rising cost of childcare and housekeeping services in just the past few years, with Ontario outpacing the rest of the country in terms of year over year change when it comes to such costs.

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My desktop is littered with charts such as these, charts that tell more precise stories about the nature of the broader statistics that we hear about. Overall one story repeatedly stands out, and that is that inflation rate may be low, but in all the ways you would count it, it continues to rise.

DIe6Fh2UMAEDmaIIn Ontario the price of food is more expensive, gas is more expensive and houses (and now rents) are also fantastically more expensive. To say that inflation has been low is to miss a larger point about the direction of prices that matter in our daily lives. The essentials have gotten a lot more expensive. TVs, refrigerators and vacuum cleaners are all cheaper. This represents a misalignment between how the economy functions and how we live. 

DJs5AdwXoAANcDTEconomic data should be meaningful if it is to be counted as useful. A survey done by BMO Global Asset Management found that more and more Canadians were dipping into their RRSPs. The number one reason was for home buying at 27%, but 64% of respondents had used their RRSPs to pay for emergencies, for living expenses or to pay off debt. These numbers dovetail nicely with the growth in household debt, primarily revolving around mortgages and HELOCs, that make Canadians some of the most indebted people on the planet.

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In the past few years, we have repeatedly looked at several stories whose glacial pace can sometimes obscure the reality of the situation. But people seem to know that costs are rising precisely in ways that make life harder in ways that we define as meaningful. When we look at healthcare, education, retirement, and housing it’s perhaps time that central banks and governments adopt a different lens when it comes understanding the economy.

2017 – The Year Ahead

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Many of you won’t know this, but my father used to sky dive. He’d stopped by the time I was born (reportedly because my mom had a natural aversion to life threatening hobbies) but in many ways his hobby would be a reoccurring source of guidance for life lessons.

For instance, whenever I was nervous about doing some BIG THING, my dad would let me know that once you were doing THE BIG THING, your anxiety would drop considerably. Sky divers know this, as they are only nervous until they jump out of the plane, and then get very calm. The fear is in the anticipation, not the actual doing.

2016 had a lot of anticipation, but not an actual lot of doing. Brexit happened, but hasn’t really happened. Donald Trump has been elected, but hasn’t been sworn in. The Canadian housing market continued its horrific upward trend and news stories began to abound about the looming robot job-pocalypse. 2016 was full of anticipation, but little action.

donald-twitterbot2017 will begin to rectify some of these issues. Next week we will see the arrival of President Donald Twitterbot™, finally ending speculation about what kind of president Donald Trump will be and seeing what he actually does. So far markets have been reasonably calm in the face of the enormous uncertainty that Trump represents, but his pro-business posture seems to have got traders eager for a more unregulated market with greater earnings for the future. Right now bets are that Trump might really jump start the economy, but there are real questions as to what that might mean. Unemployment is already very low and inflation looks like it is actually beginning to creep up. Housing prices (amazingly) are back to 2007 levels and the economy seems to be moving into the later stages of a growth cycle.

2017 will likely not be the year that the Canadian housing bubble/debt situation comes crashing down, but its also unlikely to be the year that the situation improves. Economically the short term outlook for Canada is already kind of bad. The oil patch is already running second to a more robust energy story from the United States. Canadian financials had a very healthy year last year, but as we’ve previously written while the TSX was the best returning developed market over 2016, in a longer view it has only recently caught up with its previous high from 2014.

2017 may be the year that automation starts being a real issue in the economy. Already much of Donald Trump’s anger towards globalisation is being challenged by analysis that shows its not Mexico that steals jobs, but robots. But as robots continue to be more adept at handling more complicated tasks there is simply less need for humans to do much of that work. Case in point is Amazon’s new store Amazon Go, currently being opened in Seattle.

While many point to this as Amazon’s foray into the world of groceries (and a better shopping experience) Amazon’s real business is in supply management. The algorithms they use and the new technology they’ve developed are not designed to be one offs, but ways to handle high volumes of business traffic with as few people, and as low a cost as possible. Combined with driverless cars (currently being tested in multiple cities & countries)and our growing app economy, we will be pushing more people out of steady work across multiple sectors of the economy in coming years.

brexit

2017 will also be the year that Brexit will begin, though it will be two years before it is complete. Many people will be watching on how Teresa May’s government handles the Brexit negotiations, how confident England looks on its position, and how hostile or open Europe seems to be to conceding to Britain’s views. Either way it should provide lots of turbulence as it unfolds over the coming years.

But despite all this, there is a kind of calm in the markets. We’ve crossed the line on these issues and there’s nothing to do but continue ahead. Trump will be President Donald Twitterbot™, Brexit will happen, regardless of how many people remain opposed and markets will either go up or down as a response. Perhaps the new normal is a great deal more similar to the old normal than we all thought.

Then again…

 

This House Kills the Middle Class

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This house sold for $1,000,000 in Vancouver. Is it houses that are in demand, or land?

In the mountains of articles written about Toronto’s exuberant housing market, one aspect of it continues to be overlooked, and surprisingly it may be the most important and devastating outcome of an unchecked housing bubble. Typically journalistic investigation into Toronto’s (or Vancouver’s) rampant real estate catalogues both the madness of the prices and the injustice of a generation that is increasingly finding itself excluded from home ownership, finally concluding with some villain that is likely driving the prices into the stratosphere. The most recent villain du-jour has been “foreign buyers”, prompting news articles for whether their should be a foreign buyer tax or not.

What frequently goes missing in these stories are the much more mundane reasons for a housing market to continue climbing. That is that in the 21st century cities, like Toronto, now command an enormous importance in a modern economy while the more rural or suburban locations have ceased to be manufacturing centres and are now commuter towns. Combined with a growing interest in the benefits of urban living and the appeal of cities like Toronto its no surprise that Toronto is the primary recipient of new immigrants and wayward Canadians looking for new opportunities.

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Toronto itself, however, has mixed feelings about it’s own growth. City planners have made their best efforts to blend both the traditional idea of Toronto; green spaces, family homes and quiet neighbourhoods, with the increasing need of a vertical city. Toronto has laid out its plans to increase density up major corridors while attempting to leave residential neighbourhoods intact. Despite that, lots of neighbourhood associations continue to fight any attempt at “density creep”. Many homeowners feel threatened by the increasing density and fear the loss of their local character and safety within their neighbourhoods, at times outlandishly so. Sometimes this comically backfires, but more often than not developers find themselves in front of the OMB (Ontario Municipal Board) fighting to get a ruling that will allow them to go ahead with some plan, much to the anger of local residents and partisan city councillors.

The result is that Toronto seems to be growing too fast and not fast enough simultaneously, and in the process it is  setting up the middle class to be the ultimate victims of its own schizophrenic behaviour.

High house prices go hand in hand with big mortgages. The bigger home prices get the more average Canadians must borrow for a house. Much of the frightening numbers about debt to income ratios for Canadians is exclusively the result of mortgage debt, while another large chunk is HELOCs (home equity lines of credit). Those two categories of debt easily dwarf credit cards or in store financing. This suits banks and the BoC not simply because houses are considered more stable, but because banks have very little at risk in the financial relationship.

To illustrate why banks have so little at risk, you only need to look at a typical mortgage arrangement. Say you buy a $1 million home with a 20% down payment, the bank would lend you $800,000 for the rest of the purchase. But assume for a second that housing prices then suddenly collapse, wiping out 20% of home values, how much have you lost? Well its a great deal more than 20%. Because the bank has the senior claim on the debt, the 20% of equity wiped out translates into a 100% loss for you, the buyer. The bank on the other hand still has an $800,000 investment in your home that must be paid back.

Bank vs you

By itself this isn’t a problem, but financial stability and comfort is built around having a set of diversified resources to fall back on. In 2008, in the United States, home owners in the poorest 20% of the population saw not just their home prices collapse, but also all of their financial resources. On average if you were part of the bottom 20% you only had $1 in other assets for every $4 in home equity. By comparison the richest 20% had $4 in other assets for every $1 in home equity. The richest Americans weren’t just better off because they had more money, but because they had a diversified pool of assets that could spread the risk around. Since the stock market bounced back so quickly while much of the housing market lagged the result was a widening of wealth inequality following 2008.

Housing impact
The impact of 2008 on household net worth by quintile. From House of Debt by Atif Mian and Amir Sufi

In Toronto the situation is a little different. Exorbitant house prices means lots of people have the bulk of their assets tied up in home equity. Funding the enormous debt of a house may preclude investing outside the home or building up retirement reserves in RRSPs and TFSAs. A change in interest rates, or a general correction in the housing market would have the effect of both wiping out savings while simultaneously raising the burden that debt places on families.

The issue of debt is one that the  government and the BoC take seriously, yet despite the potential impact of high debt levels on Canadians and the looming threat it poses to the economy the mood has remained largely indifferent. The BoC, under the governorship of Stephen Poloz, has said that it isn’t worried too much about Canada’s housing market. This isn’t because there isn’t a huge risk that it could implode, but because even if it does it is unlikely to start a run on the banks. By comparison the view of Stephen Poloz on the debt levels of Canadians is that its your problem. A curious stance given that the BoC’s position has been to try and stimulate the economy with low borrowing rates.

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There will probably never be as full throated a reason for my job than the burden the Toronto housing market places on Canadians. From experience we know that concentrating wealth inside a home contributes to economic fragility, potentially robbing home owners of longer term goals and squeezing out smart financial options. But far more important now is that city councillors and home owners come to realize that the housing market is more prison than home, shackling the city to ever more tenuous tax sources and weakening the finances of the middle class. Until then, smart financial planning alongside home ownership is still in the best interests of Canadian families.

Are Economists Incompetent or Just Unhelpful?

 

 

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When economists get things wrong their missteps are practically jaw dropping. Despite making themselves the presumed source of useful information about economies, interest rates and economic management, often it seems that the economists are learning with the rest of us, testing ideas under the guise of sage and knowledgable advice. Their bias is almost always positive and the choices they make can be confounding.

As an example, let us consider the case of the Bank of Canada (BoC).

If there are perennial optimists in this world they must be employed at the BoC, for no one else has ever stared more danger in the face and assumed that everything will be fine.

For those not in the know, the BoC publishes a regular document called the Financial System Review, a bi-annual breakdown of the largest threats that could undo the Canadian economy and destabilize our financial system. Because they are the biggest problems we tend to live with them over a long time and thanks to the Financial System Review we can see how these dangers are presumed to ebb and flow over time.

For instance, two years ago the four biggest dangers according to the BoC were:

  1. A sharp correction in house prices
  2. A sharp increase in long-term interest rates.
  3. Stress emanating from China and other Emerging Markets
  4. Financial stress from the euro area.

Helpfully the BoC doesn’t just list these problems but also provides the presumed severity and likelihood of them coming to pass and places them in a useful chart.

Here is what that chart looked like in June of 2014:

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The worst risk? A Canadian housing price correction. The likelihood of that happening? very low. Meanwhile stress from the Euro area and China rate higher in terms of possibility but lower in terms of impact.

By the end of 2014 the chart looked like this:

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Unchanged.

Interestingly the view from the BoC was that there was no perceivable difference in the risks to the Canadian market. Despite a Russian invasion of the Ukraine, the sudden collapse in the price of oil and the continued growth of Canadian debt, the primary threats to Canada’s economy remained unmoved.

So what changed by the time we got to mid 2015?

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The June 2105 FSR helpfully let Canadians know that, presumably, threats to Canada’s economy had actually decreased, at least with regards to problems from the euro area. This is curious because at that particular moment Greece was engaged in a game of brinkmanship with Germany, the IMF and the European Bank. Though Greece would go on to technically default and then get another bailout only further kicking the can down the road, the view from the BoC was that things were better.

Interestingly the price of oil had also continued to decline in that period, and the BoC had been forced to make a surprise rate cut at the beginning of the year. Debt levels were still piling up, and there was a worrying uptick in the use of non-regulated private lenders to help get mortgages.

None of that, according to the analysts at the Bank of Canada, apparently mattered. At least not enough to move the needle.

The December 2015 FSR is now out, and if we are to take a retrospective on the year we might point to a few significant events. To begin, the economy was doing so poorly in the summer that the BoC did a second rate cut, which was followed by further news that the country had technically entered a recession (but nobody cared). Europe’s migrant crisis reached a tipping point, costing money and the risking the stability of the EU. Germany’s largest auto maker is under investigation for a serious breach in ethics and falsifying test results. China’s stock market began falling in July, and the Chinese government was forced to cut interest rates 5 times in the past year. The United States did their first rate hike, a paltry 25 bps, but even that has helped spur a big jump in the value of the US dollar. Meanwhile the Canadian dollar fell by nearly 20% by the end of 2015.

And the Bank of Canada says:

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Things are better? Or not as severe?

In two years of producing these charts, despite continued worsening of the financial pictures for Canada, China, the EU and even the United States, the BoC’s view is still pretty rosy. What would it take to change any of this?

Whether they are right or not isn’t at issue. It’s the future and it is unknowable. What is at issue is how we perceive risk and how ideas about risk are communicated by the people and institutions who we trust to provide that guidance. This information is meaningless if we can’t understand its parameters and confusing if a worsening situation seems to change nothing about underlying risk.

As you read this I expect the Chinese and global markets to be performing better this morning on reassuring news about Chinese GDP. But I would ask you, has the risk dissipated or is it still there, just buried under positive news and investor relief? It’s a good question and exactly the kind that could use an honest answer from an economist.

 

Trudeau’s Millionaires & Everyone’s Tax Hike

trudeau-wynne-20150129As a rule I dislike large majority governments. Far from believing that minority or coalition governments are unworkable, we have a good history of weak governments focusing on practical solutions that usually avoid the trappings of their respective ideological ends. Because the thing that worries me most about governments is not the promises they won’t keep, but the promises they will.

The resounding victory for the Liberal Party and Justin Trudeau means that the big worry for Canadians should be exactly this. Trudeau has promised rollback TFSA contributions, decreases in the planned rise of OAS, and add a new tax on people earning more than $200,000. Tax hikes haven’t been a popular part of political platforms over the past few decades, yet Trudeau’s platform was successful for precisely that, tackling perceived inequalities benefiting “millionaires” and a promised difference in governing style from the more insular and autocratic Harper.

While I may personally quibble over defining (and vilifying) “millionaires” as people earning more than $200,000, we must acknowledge that an upper tax rate of 33% on income over $200,000 isn’t so cumbersome that we should start panicking and freaking out. That is until you add in the provincial taxes.

Assuming that everything goes to plan, the top tax bracket in Ontario will be 54% sometime next year. That won’t even make Ontario unique. More than half of the provinces will have a top tax bracket in excess of 50%, with the highest being New Brunswick, clocking in at an impressive 59%. And what of the tax cut for earnings between $45,000 to $90,000? While it is estimated to put around $670 back into your pocket, it’s relief may be short lived in Ontario.

Hot on the heels of that cut will be the new ORPP, or Ontario Retirement Pension Plan, which will take about 1.9% of your salary by 2017, easily eating up whatever tax savings you were just given and then some.

ORPP Schedule

It’s easy to lose perspective on taxes and become an annoyance at family dinners, complaining about your money being stolen by evil government officials. But that shouldn’t mean that we aren’t vigilante about how much we pay in taxes either. On the docket across the country tax hikes are poised in every corner. In Alberta the NDP has raised taxes on corporations, even as the economy weakens. In Ontario the Liberals have decided to allow each municipality to set their own land transfer tax, representing a likely hike for many cities. And of course federally, the ending of income splitting, the rolling back of TFSA contribution room and the aforementioned new tax bracket all represent new costs for citizens.

I have an open dislike of Trudeau’s use of the term “millionaires” and “the wealthy” to talk about people earning $200k, it seems like a semantic trick. Few of us, after all, can muster the courage to defend an income that many will never see. But as unsympathetic as we may be to the “1%”, we should be mindful that taxes go up to cover costs, and if the economy slows or debt balloons, we may find that the “millionaires” encompasses an increasing number of us.

Canada’s Bad Week (Or The Best Recession Ever)

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Perennial pessimists like myself have been waiting for something to go wrong with the Canadian economy for some time. But years have passed and the economy continues to defy logic. Despite abundant consumer debt and a housing bubble of record proportions, and an economy dependent on volatile material and natural resource markets, disaster has forever loomed but never struck. And while the TSX hasn’t always been the strongest performer, the Canadian stock market has proven to be quite resilient over the past few years.

TSX performance YTD, July 24, 2015. Yahoo Finance
TSX performance YTD, July 24, 2015. Yahoo Finance

That may be coming to an end however. The TSX has had five negative days in a row, following a sudden cut in Canada’s key interest rate. This is the second unexpected cut this year, dropping the lending rate from 1% to 0.5%. Energy prices remain quite low, off 50% from their high last year, and severely stunting Alberta’s economic engine. The Bank of Canada (BoC) was reportedly taken by surprise by the negative GDP numbers for April, marking four consecutive months of GDP contraction and edging us closer to an “official” recession of two consecutive negative quarters. Just this week the BoC predicted a $1 Billion deficit, challenging the Federal Government’s expectation that they would have a $1.4 Billion surplus.

Joe Oliver flees reports after refusing to take questions
Joe Oliver flees reports after refusing to take questions
The price of West Texas Crude, over the past 18 months. From NASDAQ
The price of West Texas Crude, over the past 18 months. From NASDAQ

The optimism that surrounds Canada’s economic future is an unspoken assumption that a reviving US economy floats all boats, just maybe not this time. As the United States economy continues to improve, the Federal Reserve continues to remain optimistic about raising the lending rate, a sign of burgeoning economic strength. Canada is going the other direction, and for now it seems, the two economies are diverging.

Things could still turn around; the Canadian economy has shown surprising resilience so far, and our falling dollar could very well help super charge the Ontario manufacturing engine, or the price of oil could begin a steep rise (it has in the past) and restart the Alberta economy. But the challenges faced are fairly enormous. 

But if I’m concerned about one thing, it seems to be the general Canadian obliviousness to the problems we are facing. The National Post called this the “Best Recession Ever”, because of how little has changed despite the worsening GDP. The BoC’s June Financial Service Review highlighted that the biggest threats to the Canadian market would be “some event” that would make it difficult for Canadians to service their ballooning debt, but that such an event was “very unlikely”. That was despite the collapsing oil price and the sudden need for two interest rate cuts.

 Optimism can easily become denial as “experts” twist themselves into knots attempting to explain how risks are really benefits, danger is really safety and hurricanes are only storms in teacups. And while business news thrives off of both controversy and hyperbole, there is also a vested interest in making things seem like they are under control. The news should be exciting, but never give the impression that the experts don’t know what is going on. Thus, everything is explainable and only in hindsight do we acknowledge just how out of control it seemed to be. Whether this is the case for Canada right now is hard to say. But the risks associated with Canada have been large for some time, and they have been ignored, dismissed or marginalized regularly by experts within the media. Being a smart investor means facing those risks honestly and acting accordingly.

Cities Are Hurting Your Retirement

The Economist endorses the Walker Report!

Well not really, but they have joined my cause on the problems we face with regards to urbanism and increasing urban density. It’s not everyday that you can say that the economist endorses your position (even if they don’t know it) but in early April my constant nagging about the insane price of housing became a feature for the weekly.

Most Expensive Cities In The World To Live In

How it felt when I saw The Economist article on wasted space in cities.
How it felt when I saw The Economist article on wasted space in cities.

If you haven’t been keeping up, I essentially have three big issues with homes in Canada:

  1. House prices are too high, especially in cities, which is driving a debt problem for many Canadians.
  2. Inflation in the housing market is likely creating a bubble, and considerable risk is building into the Canadian housing market as people over extend themselves.
  3. This problem is compounded by the need for city living. Increasingly people’s jobs depend on living in one of Canada’s big cities, where restrictions on development are aggrivating the situation.

Canada’s housing market is therefore a confusing and expensive mess. The risk is high but the need for housing is great and this fuels a great deal of arguments over how great the problem in Canadian housing really is.

The Economist’s take on this matter is an interesting one. It’s not just Canada that has an urban housing problem. Name a major urban centre and you are likely to see the same problem repeated. From Tokyo to London to New York and back to Vancouver urbanites everywhere are dealing with escalating home prices.Rising Property Prices

But the problem goes beyond merely being frustrated by increasing realty costs. Housing is a significant aspect to any economy. Building homes makes a lot of jobs, but affordable housing encourages a growing economy. As home prices eat up income there is simply less money to go around. It hurts domestic growth, slows trade and reduces standards of living.

The culprit is not a big bogeyman like the banks (though they are benefiting from this situation) but ourselves. In an effort to improve aesthetic standards of living by restricting changes to our surroundings we have unwittingly hurt our economic standard of living. Almost every city today is burdened with development guidelines and urban bylaws that restrict density and height. These rules run into the hundreds of pages and fill volumes in most city halls around the globe. It’s made cities like Bombay one of the most expensive in the world in a country that is one of the poorest. It restricts taxes and hinders economic and city improvements.

And cities need taxes. We tend to be critical of enormous budgetary outlays for cities, but whether it’s a new subway line in Toronto or a super-sewage pipe in Mexico City, cities depend on the taxes that are generated primarily through dense urbanization. This week the free newspaper Metro published an article showing which wards in the city of Toronto contribute the greatest amount in taxes. Unsurprisingly the “downtown” wards contributed the bulk of city revenue. Wards out in Scarborough had some of the lowest, a difference in the hundreds of millions of dollars for city revenue. Some are quick to point out that the “lie” about spoiled downtowners, but the reality is that density improves economic performance and reduces the burden of taxes while improving its efficiency.

https://twitter.com/Walker_Report/status/590534234059706368

The Economist argues that we waste space in cities, and that comes with a high cost. According to their article the US economy is 13.4% smaller than it could have been in 2009, a total of $2 trillion. Because cities that offer high incomes (like San Francisco) become too expensive people endup working in lower productivity sectors, while making it difficult to live for those that choose to reside in those cities. In the case of Canada this potentially fueling an enormous and dangerous housing bubble while undermining our economic growth. But this is a problem of our own doing. Through our own efforts we have masterminded a situation that threatens our own economic well being. The question that remains is whether we can be clever enough to undo it before it hurts us all.

As for The Economist I will assume they should be calling me anytime to start writing for them regularly….

That phone call should be coming any minute now...
That phone call should be coming any minute now…

The Financial Challenges of Being a Young Canadian

Meanwhile, at Starbucks
Meanwhile, at Starbucks

It is a common enough trope that people do not save enough, either for retirement or just generally in life. We are a society awash in debt, with some estimates showing Canadians carrying an astonishing $27000 of non-mortgage debt and an average of three credit cards. This financial misalignment, between how much we spend (bad) and how much we save (good) is a source of not just economic angst, but denouncements of sinfulness and failings of moral behavior.

This isn’t an exclusively Canadian problem. Pretty much everyone across the developed world has been accused of both not saving enough and carrying too much debt, and the remedy is usually the same, save more and spend less. Underneath that simplistic advice is the nuance that goes into managing money; the importance of paying down debt, of saving some of what you earn on payday (so you don’t see it) and a host of other little things that define good money habits.

bombardier-thunder-bay-plant-subway
This TTC Subway car is built in Thunder Bay. Because Toronto needs more subways, because it is a desirable, albeit expensive place to live.

But for young people trying to save and spend less they may find that the struggle is far greater than anticipated and the advice they are given can be frustrating in its obtuseness. For instance, one of the first solutions financial gurus give is “cut back on the lattes”. In one of our first articles we ever wrote was about the “Latte Effect”, (That Latte Makes You Look Poor) and how the math that underlies such advice, while not bad, isn’t going to fund a retirement.

In fact cutting costs is extremely difficult. Vox.com recently offered some advice for saving more. Pointing out that big ticket items are more useful in cost cutting than small items, the article made the improbable suggestion to “consider moving to a cheaper metropolitan area” if you are finding San Francisco or New York too expensive. Seriously. As though living in cities was a choice exclusively connected to cost, or that Minneapolis was simply New York with similar opportunities but cheaper.

In Canada this advice falls even flatter. While you can live many places, not all offer similar opportunities. Living in Windsor means (typically) making

As a financial advisor I am required to spit on the ground and curse when the subject of credit cards comes up.
As a financial advisor I am required to spit on the ground and curse when the subject of credit cards comes up.

cars. Thunder Bay offers both lumber production and a Bombardier plant. But if you are part of the 78% of Canadian GDP that is connected to the service sector, either through banking, finance, health services, government, retail, or high tech industries you are likely in one of four major cities, Toronto, Vancouver, Calgary or Montreal. It should be no surprise that young Canadians, facing ever increasing house prices haven’t actually abandoned major cities for “cheaper alternatives” since most of the jobs tend to be concentrated there.

full-leaf-tea-latteSo for young Canadians the challenge is quite clear. Cutting back on your expensive coffees could save you between $1000 – $2000 per year, but that won’t get you far in your retirement. Serious changes to costs of living are challenging since the biggest cost of living in cities is frequently paying for where you want to live. In between these extremes we can find some sound advice about budgeting and restraining what you spend, but it is fair to say that many young people aren’t saving because they enjoy spending their money, but because they don’t yet have enough money to cover their major costs and maintain a lifestyle that we generally aspire to.

It’s worth noting that most financial advice is pretty good and sensible, even things like watching how much you spend on coffee. Credit cards, lines of credit and overdrafts are all best avoided if possible. A solid budget that allows you to clearly see your spending habits won’t go amiss. And if you do choose to spend less on the small luxuries, it isn’t enough that the money stays in your purse or wallet. It must go somewhere so it can be both out of reach and working on your behalf or you risk spending it somewhere else.

At university and have no income? How about a credit card?
At university and have no income? How about a credit card?

But it is financially foolish to assume that people don’t want to save. The Globe and Mail recently ran a profile on the blogger “Mr. Money Mustache” – a man who retired at 30 with his wife and claims that the solution to retiring young is to wage an endless war on wasteful spending. And he means it. Reading his blog is like reading the mind of an engineer. From how he thinks about his food budget, to what cars you own, his advice is both sound and confounding. It might be best summed up as “live like your (great) grandparents”. Sound advice? Absolutely! Confounding? You bet, since the growth in the economy and our standard of living exists precisely because we don’t want to live like our grandparents.

There is no good solution or answer here. Young Canadians face a host of challenges on top of all the regular ones that get passed down. Raising a family and buying a home are complicated by financial peer pressure and inflated house prices. Choosing sensible strategies for saving money or paying down debt (or both) often means getting conflicting advice. And young Canadians have no assurances that incomes will rise faster than their costs, nor can they simply relax about money. They must be vigilant all the time and avoid financial pitfalls that are practically encouraged by the financial industry. Finding balance amidst all this is challenging, and young Canadians should be forgiven that they find today’s world more financially difficult than the generation previous.