Tag: Toronto Housing

The Unravelling

In his book Fooled by Randomness, Nassim Taleb says of hindsight bias “A mistake is not something to be determined after the fact, but in the light of the information until that point.”  With this guidance we can forgive some of the covid precautions and restrictions governments imposed on populations in 2020, a period of great uncertainty. 

But in mid-2022 assessing the course of action by governments and central banks as they attempt to tackle a number of non-pandemic related crises (as well as still managing a pandemic that is increasingly endemic) I think its fair to say that mistakes are being made. From political unrest, to cost of living nightmares and finally inflation dangers, the path being plotted for us should be inviting closer scrutiny by citizens before we find ourselves with ever worsening problems. 

Let’s start with the twin risks of inflation and interest rates. Inflation is high, higher than its been in decades, and central banks the world over are attempting to stamp this out with aggressive rate hiking. It is easy to point to Turkey, a country whose inflation rate is 70%, and see that their recent cutting of interest rates is a mistake in the face of such crippling inflation. But what are we to make of North American efforts to slow inflation, even at the risk of a recession? Inflation for much of the West has been tied to economic stimulus (in the form of government action through the pandemic), supply chain disruptions and low oil and gas inventories. The economy is running “hot”, with lots of businesses struggling to find employees. But inflation, measured as the CPI is a rear-view mirror way of understanding the economy, also known as a lagging indicator. But here is one that is not. The price of container freight rates, which have fallen substantially from the 2021 highs.

We can count other numbers here too. The stock market, which is having a bad year, has fallen close to pre-pandemic highs. A $10,000 investment in the TSX Composite Index would have a return of 6.1% over the past 28 months, or an annualized rate of 2.6%. In February of this year that annualized rate was 8.85%, a 70% decline in returns. The numbers are worse for US markets. While US markets have performed better through the pandemic, the decline in the S&P500 is roughly 75% from its pandemic high in annualized returns (these numbers were calculated at the end of June, offering a recent low point in performance).

For many who felt that the stock market was too difficult to navigate but the crypto market offered just the right mix of “can’t fail” and “new thing”, 2022 has wiped out $2 trillion (yes, with a “T”) of value. 

In fact speculative bubbles are themselves inflationary and their elimination will also help reduce inflation. Writes Charles Mackay in his famous book Extraordinary Popular Delusions and the Madness of Crowds (1841) on the Mississippi Bubble in France, “[John] Law was now at the zenith of his prosperity, and the people were rapidly approaching the zenith of their infatuation. The highest and lowest classes were alike filled with a vision of boundless wealth…”

“It was remarkable at this time, that Paris had never before been so full of objects of elegance and luxury. Statues, pictures, and tapestries were imported in great quantities from foreign countries, and found a ready market. All those pretty trifles in the way of furniture and ornament which the French excel in manufacturing were no longer the exclusive play-things of the aristocracy, but were to be found in abundance in the houses of traders and the middle classes in general.”

Evidence today indicates that supply chains are beginning to correct, an important component of taming inflation, while trillions of dollars have been wiped out of a speculative bubble. Even oil, which seems to be facing structural issues that would normally be inflationary has had a significant retreat, along with other commodities like copper, lumber and wheat. Some of these declines may only be temporary as markets react to recession threats, but these declines do not happen in a vacuum. They are disinflationary and should be treated as such.  

But central banks seem ready to trigger a recession in the name of defeating the beast of inflation even as it seems to be bleeding out on the ground. In June the Federal Reserve raised its benchmark interest rate by 0.75%, and the current view is that the Bank of Canada is likely to do the same in July. All this is sparking deep recession fears that seem to be driving markets lower. 

In the background remain genuine issues that seem to be addressed at best haphazardly. Inflation is a real issue making food prices go up, but its been crushing people in housing for years. Even as interest rise and house prices moderate lower, average rents in the GTA were up 18% over the last year. The Canadian government’s response to the mounting costs of living has been to propose a one time payment of $500 to low income renters. That is just a little more than the average increase in rent over the previous 12 months. 

In the face of such mounting housing pressure the city of Toronto has done the following things:

  1. Ban the feeding of birds.
  2. Consider the leashing of cats.
  3. Raised development fees 49%. 

For the record, Toronto is believed to have the second biggest property bubble globally. 

Globally Europe looks to be on the cusp of a serious recession. If North American central banks are looking too aggressive, Europe is struggling to chart a path for its shared currency. Rates have been at record lows but recently the ECB has said it will begin raising rates to tackle inflation. Across the continent the rate of inflation is over 8.1%, but it varies widely country to country, with Germany closer to the average, while Lithuania is at 22%. In the face of mounting inflation the ECB hasn’t raised rates once yet this year, though its expected to this month, even has the European economy and stock markets have been doing worse and worse. 

Coincidentally, Germany, who is now both the linchpin in NATO support for Ukraine while simultaneously its weakest link, has seen its economic health crumble due to decisions made years ago to pin Germany’s energy needs to Russian energy supplies. Will Germany today be able to make political decisions that support NATO and the EU even if it means further economic pain for a country that has grown accustomed to being the beneficiary of these arrangements?

It is not just Western or developed nations that are struggling. China is in the middle of some kind of debt bubble in its real estate market, whose impact is harder to know, but will likely be long lasting given its size. Numerous developing nations are on the cusp of debt defaults, the tip of the iceberg being Sri Lanka.

A small island nation off the southern tip of India, Sri Lanka has been reasonably prosperous over the past few decades with an improving standard of living. Yet government mismanagement, graft and a haphazard experiment in organic farming have left the country destitute. Literally destitute. Out of money, gas and food. In the past few days protests have moved beyond general unrest into a full blown revolution, with the Sri Lankan people storming the government and the political leaders fleeing for their lives.

Behind them is El Salvador which has decided to embark on an experiment in making Bitcoin an official currency, a move designed to liberate the country from the tyranny of the World Bank and the US Government. It has instead likely led to a default, financial instability, and a more regressive and authoritarian government. 

This year stands out for the complex problems that have grown out of the pandemic, but if we’re serious about the kinds of big problems politicians regularly say that must be tackled, then it raises a question as to whether we are handling them properly, or whether we are making mistakes given what we know right now.

For the last few years I have written or touched on many of these topics; on housing, inflation, crypto currencies and the fragile nature of many of our institutions. And while I am cautious about making grand predictions, it remains worth asking whether we are making smart choices given what we know, and if we are not we should be making greater demands of our elected leaders. And if our elected officials continue to make poor decisions, we as investors should plan accordingly.

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by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

The New Class War: Can Our Society Be Made More Equal?

New Class War

Amidst all the various news during this ongoing pandemic, reports that American billionaires are getting richer, particularly those focused in tech, is unlikely to bring anyone much comfort. Though much is often made of income inequality, I tend to believe that inequality in of itself is not a pressing concern for most people. What does stick in the minds of your average citizen is that no matter what tragedy seems to befall the world, the richest keep getting richer, while their own situation continues to erode.

There are two interconnected factors at play here. One is how billionaires continue to do so well. The other is related to declining fortunes and mobility for a middle class that is less middle, but increasingly more class orientated.

The rise of a super-rich has a great deal more to do the dominance of the stock market in an age of globalization than any other single factor. You’ve probably heard some statistic like this before, that in the past a CEO would only have made 20x more than their lowest paid employee, only to find now that the ratio is 278x more than the average worker. Much of this shift has been a result of moving compensation for CEOs and C-level executives into stock options, a move aimed at improving governance, but has instead hyper charged the importance of stock returns in an increasingly globalized world.

Land of Promise

In his book Land of Promise by Michael Lind, he has this to say about globalization and global trade: “Between the end of the Cold War and the crash of 2008, globalization resulted in the organization of one global industry after another as an oligopoly, with most of the transnational enterprises headquartered in the United States, Europe, or Japan…Two companies, US-based Boeing and Europe’s Airbus, had 100 percent of the global market share in large jet airliners. Among their suppliers, the global market for jet engines was divided among three firms: GE, Pratt and Whitney, and Rolls-Royce. Microsoft enjoyed 90 percent of the global market share for PC operating systems. Four firms divided 55 percent of the PC market among themselves, while three companies shared 65 percent of the mobile handset phones. Three firms dominated the world market in agricultural equipment (69 percent) and ten companies dominated the global pharmaceutical market (69 percent). Ninety-five percent of microprocessors (chips) were made by four companies – Intel, Advanced Micro Devices, NEC, and Motorola. Four automobile companies – Gm, Ford, Toyota-Daihatsu, and DaimlerChrysler – manufactured 50% of all cars, while three firms – Bridgestone, Goodyear, and Michelin – made 60% of the tires. Owens-Illinois and Saint Gobin made two-thirds of all glass bottles in the world. Concentration in global finance was accelerated by US deregulation, which allowed the emergence of a small number of US megabanks, some of which grew even more during the Great Recession when, with the support of the US government, they absorbed failing banks, as Bank of America took over Merrill Lynch and JP Morgan Chase acquired Washington Mutual.”

However you may wish to slice it the system of globalization has been a huge boon to the wealthiest globally, consolidating wealth amongst an increasingly narrow group of companies and the people who own the bulk of the shares within those companies. And the more importance share holder returns have taken on, the more consolidated those companies have become.

The second problem I’ve mentioned is that of a middle class that is increasingly stratified. While the wealthiest keep getting wealthy, the middle class has followed suit, locking in wealth and reducing income mobility. While we may not consider life in the 1950s or 1960s particularly egalitarian, aspects about that more sexist and racist time in our past better facilitated economic mobility. For instance, a world where women did not hold many corporate positions of authority and didn’t work after marriage was also a world where women were more capable of “marrying up”. In contrast, today educated professionals marry other educated professionals. A surgeon is less likely to be married to a secretary and more likely to be married to another surgeon. The economist Tyler Cowen has called this “matching” in his book The Complacent Class, with people better able to “match” to those with similar interests and backgrounds. The effect of this “matching” has been to stratify wealth and decrease social mobility within the middle class.

the-class-sketchEducation represents another significant change that is stultifying the middle class. Education, particularly secondary education took on increasing importance in the 1980s, as those with university degrees started to out earn those with just high school, and those with professional designations (like lawyers and doctors) out paced those with just an undergraduate degree. Would more education fix this? Not really. As the cost of education continues to rise and new technologies filter into even white-collar jobs, young lawyers and accountants struggle to find work, while the management of major companies hangs in longer. The return on education continues to decline even as the costs go up, leaving those who come from wealthier educated families financially better off and better socially connected than those coming from lower income families trying leverage education into higher tax brackets.

Similarly, costs of living continue to climb in essentials. In Toronto, where housing prices have climbed steadily for the last two decades, it has given birth to an intransient NIMBYism. Homeowners, having taken on large amounts of debt to get into the housing market are generally protective of their neighborhoods and tend to push back hard on attempts to increase density for fear it pulls down housing value. Poorer neighborhoods in cities like Toronto find themselves pushed out by gentrification, an ironic blend of resistance to development that increases the price of living while denying the development that could keep prices lower for a more diverse group of residents to live together. The effect is one where neighborhoods may indeed be racially diverse, but not income diverse. The effect to a middle class is to be both more precarious and less open.

The response from governments to both these changes hasn’t been encouraging. Playing around with the tax rates, trying to force people into expensive four-year degrees, potentially embracing a universal basic income (UBI) amounts to tinkering with the system, not fixing it. And while UBI has garnered a lot of interest, it smacks of an acceptance of the current situation. If you can’t get ahead, here is some money to make life more tolerable. A population of people dependent of a government stipend is not a population that is very free. But if politicians efforts are well meaning, distrust of them remains understandable, as the political class and billionaire class rub elbows at places like Davos, recommitting to strengthening the very system that seems to be the source of many of the present issues.

Over the past several years I have dedicated this blog to the issues I think that remain most pressing from a financial standpoint to our society, frequently touching on issues of housing prices, technology, anti-urbanization, populism and the middle class. All these issues seem to be accelerating, and if there is a thought that might bind these ideas together it is a sense of loss of imagination on how we deal with major issues. In addition to a consolidation of corporate power and wealth amongst a smaller group of people, we also see fewer companies with IPOs, and fewer companies listed on the stock market in general. There is also less imagination from our political class, which remain wedded to a narrow set of ideas about how to deal with new problems.

Essential Democracy

Successful societies like Canada can be handcuffed by their past achievements, limiting options to things already tried before. But problems that do not get fixed don’t go away. Instead they fester, presenting themselves in other more threatening ways. As I write this there are riots in Minneapolis, ostensibly about the death of a citizen in police custody (part of a long list of Black Americans killed at the hands of police for nonviolent offences) but that riot has swiftly turned towards an affordable housing project and local big box stores in addition to the police. In a 2016 poll, only 30% of Americans born in the 1980s believed that living in a democracy is essential, the lowest since such polling had begun. In Europe polling showed that the core countries of the EU; Spain, France and Italy, had largely negative views about their current economic situation a decade on from the Great Recession.

Postive Economic View Europe

Now, in the middle of this global pandemic, many of these fault lines are being exposed. There may be no better way to sum up our situation than to speak of Walmart, a store that exists and thrives because of the globalized order, importing products from China. According to Ian Bremmer, the largest employer among Fortune 500 companies is Walmart, employing 2.2 million people, easily out pacing any other single company. In 2003 the CEO of Walmart, H. Lee Scott, earned 1500 times as much as a full time Walmart employee.

This trend is not confined to Canada or the United States. It is global, and affects China and India as much as it does the West. But the effect on populations of an economic story that increasingly benefits the wealthiest, while making middle classes more precarious and defensive is to undermine the legitimacy of democracies. The backsliding of democratic countries, and the erosion of the international order is connected to these domestic economic challenges. The pandemic is speeding up this inequality effect, and how we rise to meet it will play a large roll in deciding who calls the shots in the 21st Century.

Miniature people standing on piles of different heights of coins. The concepts of person and wealth.

Author’s Note – In addition to the normally sourced articles I’ve relied on several books for this article, they include:

  • Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else by Chrystia Freeland
  • The Retreat of Western Liberalism by Edward Luce
  • The Complacent Class by Tyler Cowen
  • Income Inequality, The Canadian Story (Volume 5), Edited by David A. Green, W. Craig Riddell and France St. Hilaire
  • Land of Promise by Michael Lind

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.

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc