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.

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. 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.

Toronto’s Unbelievably Fragile Condo Market

img_7318Did you know that Toronto was in a market “lull” when it came to condos? No? Neither did I. I also wasn’t aware that Toronto was sitting on a vast precipice of economic gloom when it came to our condo market. And that is precisely the take away from both the Globe and Mail and Global News about a recent economic statistic about Toronto’s condo market.

My headline is misleading. Deliberately so. But I thought I would try my hand at provocative titles to spur readership. But I have a bee in my bonnet about this kind of reporting which peddles controversial titles while failing to offer insight to investors or potential buyers interested in the market. And while that kind of reporting is common, it’s rare for such significantly differing accounts about the same market pronouncement. For instance, this is the Globe and Mail’s title and opening line to their article:

 Toronto Condo Market Booming Again –

After years of slow growth Toronto’s condo market has come roaring back to life.

Meanwhile this is what Global News had to say:

Unsold condo’s pile up in Toronto, hit 21 year high –

As far as statistical outliers on charts go, the Bank of Montreal produced a dandy on Tuesday that should get some attention from condo market watchers in Toronto.

Both of these articles start with the same source material, a brief report from BMO Capital Markets from late February, but come to different conclusions, spinning stories about either the health or weakness of the same market. The report is frustratingly short, offering little more than the statistic that a record number of condo units came on the market in January. Far from being a new normal, the record number was the result of three things, including delayed projects being finished, regular projects reaching completion and the result of strong sales from 2011.

toronto-condo-boomHowever both these articles are technically accurate, Toronto did have a record number of units come into the market, an amount eight times greater than the monthly average over the last decade. And it is true that the amount of unsold units is at a 21 year high. But to make sense of which article was correct I thought it best to reach out to BMO Capital Markets’ Director and Senior Economist Sal Guatieri, the author of the document. Sal was kind enough to make some time for me over the phone and had some useful insight about each media outlet’s take on the one-off statistic.

“They’re both right,” in answer to my question, “but one is really about the broad health of the market, which Toronto’s market really is. Last year was a very strong year for sales. But in a few years, as nearly 50,000 units are completed and when rates eventually go up, there could be some weakness in the pricing on those units.” Sal had a few other points but they largely revolved around this dynamic, that future challenges to the market are laid in the foundations of our current success.

For journalists this kind of nuanced take on the markets isn’t helpful. It isn’t provocative, and I suspect that there is a fair amount of confirmation bias for those journalists who feel strongly about the market’s relative health. Regardless, there simply isn’t enough information in the document released to promote one view over the other, and yet that is exactly what writers at the Globe and Global News pursued, versions of the story that were both more provocative and definitive than accurate. It might help with readership, but it does nothing for informing investors.

That’s the real story, and the underlying problem of reporting business news. It isn’t advice so much as a view point. Most readers will not search for the original source, nor have an opportunity to corner the economist and author to find out more. And yet depending on which story you came across you might be forgiven for thinking you had gained some real insight into the nature of Toronto’s Real Estate Market.

On the other hand, I’m highly mistrustful of the news anyhow, which is my own confirmation bias. As the author Jon Ronson once said, “After I learned about confirmation bias I started seeing it everywhere.”




America Is In Great Shape; Be Afraid!

markets_1980043cAll year people have been expecting a correction in the US Markets. For most of the year I have listened to portfolio managers discuss their “concern” about the high valuations of American companies. I have also listened to them point out that America remains the strongest economy and the most likely to see significant growth in the coming year.

Flash forward to late-September, early October and the markets have finally had their corrections. At the bottom every market was negative, including the TSX which had given up all of its YTD high of 15%. That was the bottom. The recovery was swift, money flowed back into the markets, and hedge fund managers managed to make a mockery of some otherwise nervous DIY investors. Now the markets look strong again, with the S&P 500 reaching new highs. Nobody is happy.

All of this comes on the news that US GDP was up 3.9% in the third quarter, a full .5% above analyst expectations (that sounds small, but it’s worth billions) while energy prices continue to decline, manufacturing is highly competitive and US consumers look poised for a significant Christmas bonanza. So what’s wrong with this picture? Why are both the Globe and Mail and the Financial Times worried about the US stock market?


The answer is a combination of fear, data, and the insatiable need for stories to populate the media everyday. First is the fear. Stocks are at all time highs. The problem is that “all time high” isn’t some automatic death sentence for a stock market. The stock market always hits new highs all the time, and a by-product of that is that corrections can really only happen after a high is reached. Look at the history of the S&P 500 since 1960:

Screen Shot 2014-11-26 at 11.02.50 AMAs you can probably tell, there are a lot of “new highs” that had occurred over the last 40 years, but each new high did not automatically translate into some automatic correction. There were legitimate reasons why the economy could continue to grow, and in the process make those companies in the stock market more valuable. That isn’t to say that the stock market can’t be “frothy” or that their aren’t problems in the stock market today. It merely means that setting a new market high isn’t proof of an impending collapse.

The second issue is data. We live in an age of Big Data. Data is everywhere and there is so much it can be hard to separate the useful data from the useless. Some of the data is concrete, but much of it takes time to understand or even become clear. The first analysis of the higher than expected GDP numbers seemed great (more economy, Yay!) but upon closer inspection, there are reasons to be cautious. While the GDP was higher than expected, it was largely due to growth in government spending, not consumer spending. In fact consumer spending was lower quarter over quarter. In addition there are a number of concerns about how corporations are spending their profits and whether that is sustainable. Many of these concerns, when taken in context, seem to be the same from earlier in the year.

The third factor is the insatiable need to write something. Content is king in the news world and providing insight (read: opinion) means that you must constantly produce new stories to publish. That means that there is a need to be constantly suggesting that things are about to go wrong (or more wrong than they already have) to create a compelling story. It isn’t that these stories are wrong, just that constantly saying the stock market is going to go down isn’t insightful, since at some point we can expect the stock market to correct for one of a number of reasons.

So is America frothy? Are we poised an some kind of financial collapse? I don’t know, and nobody else does either. We are no more likely to correctly know when the market might correct again than we are to guess the future price of gas. The best response is to diversify, and remember some core elements of investing. Buy low and sell high. With that in mind sturdy investors should probably start giving the beat-up and maligned Europe a second look…

California could be at a tipping point…

I’ve been quite vocal about how one day we will have to accept that things we get for free may not be free forever. Water is of particular concern for everyone not simply because it’s a necessity, but because almost none of us live with water scarcity anymore its often hard to connect the dots when it comes to facing real water shortages.

Take for instance California, whose three year drought has reached new and frightening proportions. There are some excellent articles about what impact the drought is having here and here, but take a look at these images of water reserves from 2011 and then the same locations from 2014. Running out of water is a frightening prospect, but 30 million people don’t just pack up and move because water has gotten a little scarce. What happens instead is you begin paying more for water while getting less back in economic benefits.







I highly recommend Elizabeth Renzetti’s excellent piece in the Globe and Mail today, and I suggest everyone have a read of it. Its an excellent reminder that the biggest issue we face in managing serious economic and environmental problems is not a lack of skill, knowledge, or imagination, but a simple willingness to face the problem. The outcome of which is usually higher costs for everybody immediately, and possibly disastrous results in the future.