COVID-19 the Pin for the Highly Debt-Leveraged Vancouver RE Bubble?

“While lockdowns, job losses and uncertainty are roiling property markets from the U.K. to Australia to Hong Kong, Canada’s situation is more precarious than most. As its oil sector shriveled in recent years, Canada’s economy became ever more driven by real estate, an industry now in a state of paralysis. Nearly one in three workers has applied for income support.
What’s more, its households are among the world’s most indebted, poorly placed to weather the storm.

“I think it is the Great Reckoning,” says Douglas Hoyes, a bankruptcy trustee in Kitchener, Ontario. “We’ve been in a period for so long where it didn’t matter what property you bought or how highly leveraged you were. Well, guess what? Now it matters.”

Since the economy began shuttering in mid-March to slow the spread of coronavirus, policy makers have raced to buttress the property market. Banks are offering mortgage holidays, including to landlords with multiple loans on investment properties.

That has raised eyebrows even within the real estate industry. “Should someone with four properties really be granted financial assistance?” asks Steve Saretsky, a Vancouver realtor. “Where exactly do we draw the line?”

The country may not have much of a choice but to prop up housing. Real estate has become Canada’s largest sector. Including residential construction, it accounted for 15% of economic output last year; energy accounted for 9%.

If it collapses, there’s not much that can pick up the slack — certainly not oil nor the seemingly unflappable consumer.

Canadians have been on a two decade spending spree since a downward shift in mortgage rates began in the 1990s. Toronto and Vancouver, the two biggest housing markets, haven’t had a major correction during that time. Housing turned into a wealth-conjuring machine. As values spiraled higher, homeowners felt richer — they spent more, borrowed more, and sent prices even higher.

That virtuous circle just popped. The City of Vancouver fears it’s heading for insolvency after it surveyed residents and found that 45% of households say they can’t pay their full mortgage next month and a quarter expect to pay less than half of their property tax bills this year.

It’s a stunning contrast to 2016, when those lucky enough to own a detached house in the west coast city watched their net worth balloon on average by more than C$1,600 ($1,130) a day without ever leaving home. In one year, the city’s properties surged in value by C$47 billion, more than double the cumulative take-home income of all its residents.

Tellingly, billboards by the consumer financial watchdog began cropping up — “Don’t use your house like an ATM” — as homeowners borrowed against those gains to fund renovations, vacations, and rental properties.

Today, Canadian households owe C$1.76 for every dollar in disposable income. In Vancouver, that spikes to more than C$2.30 — a ratio that puts the so-called supercar capital of North America on par with Iceland before the global financial crisis.

Recessions tend to be deeper and last longer when households are mired in debt — an alarming prospect for a nation that may already be experiencing its sharpest contraction on record. Canadians owe C$2.3 trillion in mortgages, credit card, and other consumer debt, about equal to the country’s GDP, which is an even higher ratio than the U.S. had before its housing bust.

“You have all of these flammable items that just need a spark, some external shock,” says Anthony Scilipoti, president of Toronto-based Veritas Investment Research Corp. “And this virus is a worst-case scenario none of us would have predicted.”

Airbnb Customers Vanish

It doesn’t take much to tip a seemingly tight market into a meltdown. If only 2% of the housing stock were to be listed for sale, it would trigger the kind of supply shock behind a 1990 crash, according to Veritas.

That’s most likely to come from investors, half of whom weren’t generating enough cash to cover the cost of owning their rental properties, Veritas found in a survey last September.

For loss-making landlords, things are about to get a lot worse: about 30% of apartment rent due April 1 went uncollected, according to estimates by CIBC Economics. That’s in line with similar estimates of U.S. rental collections.

Then there are those who invested in properties for the short-term rental market that’s all but dried up because of travel restrictions. Nearly a third of Canada’s Airbnb hosts — who jointly had 170,000 active listings in late 2019 — need the income to avoid foreclosure or eviction, Airbnb said in a letter to the Canadian government last month.

Confronting a swiftly collapsing pool of renters, more than 200 Canadian listings have exploded across Vrbo and Airbnb in recent weeks pitching themselves as isolation or quarantine havens, many offering Covid-19 discounts, according to data from Toronto-based Harmari, which analyzes online classifieds. Former Airbnb rental units have also cropped up in sales listings.

Shaky Pillars

Economists and lenders have long pointed to two pillars that have underpinned housing: a robust labor market and the biggest increase in international immigration in more than a century. Neither is holding up.

Nearly 6 million Canadians have applied for income support. Lenders had deferred nearly 600,000 mortgages, about 12% of the mortgages they hold, as of April 9. Meanwhile, immigration targets, based upon an earlier growing labor shortage, will almost certainly be scaled back.

In steps that dwarf those taken during the global financial crisis, the federal housing agency and the Bank of Canada are ready to purchase billions of dollars worth of mortgages and mortgage-backed securities to backstop the market, while lawmakers passed a historic wage bill to stem job losses.

“It’s great we have a government that says they have the fiscal firepower to do this but anyone with any math skills can calculate that my daughter’s grandchildren aren’t even going to be able to pay this off,” says Reza Sabour, a Vancouver mortgage broker. “What’s the plan after?”

– excerpted almost in toto from ‘Once Safer Than Gold, Canadian Real Estate Braces for Reckoning’, by Natalie Obiko Pearson, Bloomberg, 15 April 2020

—-

One could not have imagined that it may happen this way. The Vancouver RE market has for almost 20 years seemed to some of us to have been an ever-expanding speculative bubble on extremely precarious footing, awaiting a shock sufficient enough to deflate it. Even the 2008 financial crisis did not prove up to the task, largely (and perversely) because that crisis resulted in a bailout that we didn’t need in the form of free money. But the COVID-19 corona virus, for all its horrors and uncertainties, may finally force speculation out of this market. It has already punished Vancouver economic staples such as tourism, recreation, international education, air-bnb, construction, cruise ships, immigrants with cash… it’s hard to imagine how this body-blow could be easily overcome. As of this week there are still some voices of RE optimism regarding this being another blip from which we will inevitably recover. But it seems like the full reality of the necessary response to the pandemic is only now beginning to sink in. Its effects could take RE prices a long way back towards fundamentals determined by rental income streams and local incomes (levels far below recent sales prices). This is an outcome that a minority of us have called for and desired for a long time, but not one of us would have wanted it to come about through such an undesirable and hurtful mechanism.

Vancouver appears to have weathered the ‘first wave’ of COVID fairly well, without many citizens succumbing to the virus, and without our medical services being overwhelmed. This was very fortunate. We are now, after 4 weeks of ‘shutdown’, in the very challenging position of trying to calculate how to ‘reopen’, knowing that only a very small percentage of the population are now immune (possibly 5% or even lower). The re-emergence will have to be done carefully and in a very measured fashion. Ideally, it would require very labour intensive antibody testing, case identification, and contact tracking. We are not yet set up to do this (and an affordable quick reliable antibody test is not yet available). Germany is leading the way with reopening and we’ll doubtlessly be watching closely. Regardless, our population will be vulnerable until there is either an effective treatment, a vaccine, or ‘herd immunity’ (the last of these essentially meaning that 50-80% of the population would have had to have had the illness, with a substantial number getting very ill and a small minority [but still many thousands of citizens] dying). It is hard to imagine a way out that does not involve ongoing greatly decreased social and economic activity.
This is a daunting prospect, and we hope and trust that our city will be able to survive well, and emerge healthy at the end of it all.

We wish all readers strength and good fortune, and good health for themselves and their loved ones.
Stay safe and well; stay sane.
Find productive, nurturing things to do within the lockdown restrictions.
Keep in touch with family, friends and other fellow citizens.
This will pass, but be ready for it to take some time. Likely many months.

– vreaa

28 responses to “COVID-19 the Pin for the Highly Debt-Leveraged Vancouver RE Bubble?

  1. VREAA hitting it out of the park as usual.

    When Economists are writing dissertations, theses, and books about the 2004-202x era of YVR Real Estate, they will spend endless sleepless nights reviewing this blog.

    There is enough material for ten books here. Hopefully VREAA gets at least a hat tip in the various attributions.

  2. Vreaa has struck the perfect tone. These are unfortunate circumstances that no one would have hoped for.

    Economic disaster descends upon Vancouver, Canada, and the world.

    Will the underlying risk factors — rampant debt, speculation — be examined and learned from? Or will corona virus serve as the perfect scapegoat for decades of financial recklessness?

  3. Raging Ranter

    We seem to be doing quite well keeping the infection rate down. Most people have embraced the social distancing and isolation. But man oh man, the debt overhang from a 2 decade housing and consumer binge is going to take a long time to resolve. There’s no shortcut back to economic sustainability. We’ve been pulling future consumption forward for years, with debt that has grown faster than incomes, faster than GDP, faster than our ability to pay it back. Well the future just ran out of money to lend us.

    COVID-19 is the immediate threat. But after that is gone, we’ll be facing an accumulated quarter century of bad financial choices made by millions of people. And it is likely we will no longer have the ever-inflating asset bubbles in Canadian housing and US stocks to hold us all afloat. The Fed has – at least for now – put a floor under stock prices. But not even the combined forces of BoC debt purchases and massive government spending (borrowed, all of it) will be enough to rescue Canadians from themselves. Not with WTI at $18/bbl and household debt sitting at 176% of disposable income.

    Over the past few years, I’ve been trying to gently warn as many people as possible (and that would be damned few people, since most are oblivious and wish to remain that way) that these are the good times – that If you’re not getting ahead now, it’s never going to happen. Well, the good times are gone. That fiscal cliff that some of us bears suspected lay just ahead is now in our rearview mirror. Asleep at the wheel, few Canadians realize that sometime in March 2020, they drove right off it. They’re still in the Wile E. Coyote phase of suspended belief. Spirits buoyed by CERB benefits and 6 month mortgage deferrals, they eagerly anticipate a quick return to their normal debt-slave existence. They haven’t yet noticed that there’s no longer any ground beneath them.

  4. I am afraid to say it, but this is the big one. From a cyclical perspective we have a very good record in the US and Western Europe of suffering a severe economic contraction roughly every three decades. The only time in the past three centuries we skipped a cycle was in the 1960’s during the Kennedy Presidency although there was a steep market decline in that period.

    But because we missed a cycle there is quite literally nobody alive today who was an adult during the Roaring 20’s that might have stepped forward and warned we were doing all the same things now that we did back then.

    Other than that though we saw serious business cycle downturns in 1987 and of course 1929 and prior to that the Panic of 1901 and the Long Depression of 1873.

    These contractions are so consistent and predictable its a wonder they don’t teach it in school. To make my point very clear, this year is in fact the 300th anniversary of the both the Mississippi Bubble and the The South Seas bubbles which both burst in 1720 leaving little doubt in my mind that this Covid19 crash is going to result in a stronger than usual depression since its fallen on an anniversary date in the 30 year cycle pattern.

    Take cover.

  5. I don’t know why everyone seems to treat COVID-19 as a death sentence. It’s not. If you’re not super old and taking drugs for other serious morbidites, you will very very very likely come out fine even if infected. It is one very nasty cold though. It has also exposed the lack of preparation we had to deal with this (e.g. at the sentinel and response levels; at least with the Flu, we mostly have Flu monitors if not ILI monitors across the world).

    However, having said that, the incredible panic, misinformation and outsized “response” to this (e.g. economic lockdown)… we’re definitely going to pay for that. And probably in ways we’ve never imagined. (And the longer the lockdown, the stronger and longer the non-linear effects become.)

    If we’re lucky, it’ll only be the collapse of the housing bubble and everything that entails, but as soon as one central bank think it’s okay to print as much free money as possible to save everything (yes, we’re looking at the Fed…), then everyone else will to. Hyper-stagflation, where assets fall like a rock and veggies are double their price every week will not be a pretty picture.

    Of course if we think that’s our only worries… assuming we won’t just go full Socialism/Authoritarianism…. (if you can’t shut down rioting people, just misinform them, subdue them and pretend everything is okay… like in the People’s Republic of Novel-Corona).

    Of course that might be the worst outcome, but maybe my imagination just isn’t good enough to figure out what additional horrors we’re going to be dealing with. I’m hoping it’ll fall much shorter than that, but as I recall, the mantra is “hope is not a good strategy”.

    In the meantime, I’m watching in real time people panic w/ their head’s cut off, trading misinformation like it’s the new hot tulips, proclaiming their newfound medical and epidemiology expert knowledge while others resort to neighbourhood snitching and shaming. It’s like hell half descended onto earth. Meanwhile all the real experts are still reminding people to interpret the results with caution and that there is still much debate over exactly what it is we have. It also seems that people are even less able to learn or come to terms with their biases at times like this and people who have been friends for many years have been unfriending anyone who isn’t in their own echo chambers as fast as possible and then arrogantly posting that they got unfriended as though that makes them the morally “superior” person.

    It’s madness. But like someone said, this is still the “good times” even if it’s just at the end of it. I wish everyone luck in surviving the next decade.

  6. And just a word of follow up….what we are collectively experiencing at the moment is called a “Panic” and in many respects it is no different than any of the panics that preceded it where financial assets abruptly lost a substantial portion of their perceived value.

    Just knowing that this is not really a unique social /economic event will of itself help us all get through it. During panics people respond in both predictable and (anticipated) unpredictable ways. And there is always some bogeyman trying to take advantage of the situation. For our time its the vaccine agenda and dissolution of some rights. It remains to be seen how successful either of those agendas will be.

    But one thing we can be sure about is that we have already embarked down the falling side of the curve and we will not stop falling until we reach the bottom. That’s just how it works. It took tremendous energy to bring the stock markets and real estate markets to their peak but we should not doubt that the energy also runs in reverse.

    Its what causes prices to both rise and fall in cycles and patterns. And once the rising momentum is broken then the energy gets inverted and goes in the opposite direction. This is why anyone who is thinking about this with any clarity at all needs to understand that once the markets energy starts flowing out that it cannot be stopped until all of its energy has been spent.

    That is how I know that Vancouver housing is going to collapse.

  7. What a treat: Burnabonian, Raging Ranter, ‘new guy’ Bishoftu, and of course Vreaa. An oasis of sane thought in these crazy times.

    • El Ninja, if you have not yet recognized that this situation of ours is fundamentally different than everything you have experienced thus far in your life then you will probably not make a decisive move in preparations. Your expectation is likely that everything we knew as normal is going to somehow fall back into place.

      I brought up the depression cycle for a good reason. It is the metric by which this economic contraction now getting underway is going to be measured and the historical record is pretty clear on what kinds of things will happen next. The most important thing you need to know is that it is deflationary. In the process of flattening the curve we are also going to see much of the economy get flattened as well.

      I have been reading a lot of pundits recently talking about how inflation and even hyperinflation are coming on the assumption that Central Bank interventions of flooding the economy with money can only have one outcome. Of course those people cannot explain why platinum will be falling to 400 dollars this year, why silver will be trading below 10 dollars an ounce in May or why crude oil can actually trade with negative prints as it did today. Nor does any of that jive with a stock market that is just 48 hours away from its next big decline.

      Those things are the forces of deflation in action.

      What they are not getting is that the US is normally a 20 trillion dollar economy by GDP and when you shut it down it takes a few trillion just to keep it in balance and offset the losses that are taking place. This Corona Panic has taken a couple trillion out of the economy already plus untold losses in asset markets. What is being juiced up and sent back in as stimulus is little more than a band-aid and those cheques won’t likely keep coming in perpetuity.

      We will deflate. We are deflating right now. All debt bubbles in advanced economies correct by price deflation as demand withers and unemployment rises. And in the process they demolish commodity prices, housing and bonds. Even gold is going down sorry to say. The little precious is going to be a victim of its own success since its currently at a nine year cycle high and its not a defensive asset to hold against the onslaught of a collapse in asset values and the reconciliation of the excess debts that created them.

      I don’t blame you for being in denial though. What comes next is frightening and there are going to be unheard of losses. But this part of the business cycle goes way beyond discussions about housing. I only mentioned real estate because this is housing blog.

      • Raging Ranter

        I would add further that there is nothing mutually exclusive about asset price deflation and consumer price inflation. They can both exist at the same time, like they did in the 1970s and early 80s. Real household wealth dropped by 25% of GDP during the 1970s; because both housing and stocks fell in in real terms while consumer price inflation ran rampant. And even after oil prices collapsed in the early 1980s, inflation remained at 3% or higher for the rest of the decade. Thus proving that inflation can happen during extended commodity price routs too.

        By the way, El Ninja is not in denial about anything. He’s been a consistent voice of reason here for many years before you showed up.

      • Lol, you must be a union guy. Do you really believe seniority counts where any given topic is concerned? Like so and so was here first and therefore that opinion carries more weight. So hold your tongue you Johnny come lately until the big people have had their say? Too funny. No wonder the union movement got flattened.

    • Raging Ranter

      Looks like we can strike the new guy from the oasis of sane though list. 🙂 To tell you the truth, I became suspicious when he brought up the “vaccine agenda”.

  8. I think my post is/was stuck in moderation… =/ (Or gone now…)

  9. I’m not “the new guy”. I have been here for years but I did not post much since 2013 and my old name was deleted. You probably think 10 dollar silver is crazy talk. It will be here sooner than you think.

  10. I’m an admirer of Raging Ranter’s reasoned analysis and good writing. Ditto Burnabonian and Vreaa.

    Bishoftu had raised some interesting points, but he got his knickers in a knot pretty fast. I meant “new guy” in a welcoming way. And RR’s reply re: inflation was perfectly factual.

    Ah well. This blog has seen it all…

    • There was no good reply to Raging Ranter’s comment about inflation versus deflation because the two cannot be rationally compared in the same sentence without developing some serious mental conflict. If my house falls by half but the price of tomatoes doubles are we even talking about the same thing?

      I have heard this same argument put forward countless times over the years and it never ceases to impress me how doggedly its proponents hold it dear. I am not sure where they are even going with it. On the other hand if someone can show me where a debt default cycle results in the inflation of the price of assets I am all ears since those do not exist except in cases where governments have clearly decided to devalue their currencies into worthlessness. Zimbabwe is an obvious example but we are hardly in that category so there is no legitimate comparison to be made.

      What we do know however is the basics of how every developed economy functions. We know for example the average level of incomes and discretionary income required to service debts and we know the impact that high levels of unemployment will have on consumption, GPD, savings rates, insolvencies and that sort of thing.

      Unemployment is a massive deflator when it is experienced at the levels we are currently seeing now and the impact on real estate prices is a very intimately tied to those numbers.So it is easy to draw quick back of the napkin conclusions about where we are going when up to half of homeowners in Vancouver are suddenly having trouble paying their property taxes, cannot cover mortgage payments or in the case of renters, run out of money to meet their lease costs.

      What is happening is an unfathomable economic disaster and all of it is deliberately induced by the people shouting from the rooftops to flatten the curve. And that’s why we call such events panics because they are panics. It is those periods in history when the majority of chicken little’s screaming that the sky is falling manage to overwhelm common sense and all other sober thought such that the entire economic outcome is now under the control of those with the least experience in economic matters.

      Putting the medical profession and its flawed models in charge of the most important decisions regarding our collective economic well being has been a huge mistake. No doubt a great many people in Vancouver will appreciate that all the better while standing in bankruptcy court or when their home is lost in default on mortgage payments, taxes or both.

      We will know soon enough if what we got was debt deflation or veggie inflation and which is more worthy of discussion. Or were you two just trying to play Devils Advocate since I have a hard time taking your comments seriously.

      • theragingranter

        Yes, of course we’re on the cusp of a major debt bubble collapse. Duh. Nobody here is denying that, and you’d know that if you’d bothered to pay attention before becoming indignant and pounding your hurt feelings into your keyboard. This whole blog has been about the inevitable collapse of the debt-fueled housing bubble from its inception.

        But… for every dollar in asset price deflation, central banks will print 2. Or 5. Or 10. That money will end up inflating the price of something. Since asset prices are falling (see?, nobody is denying that), much of that newly created money will end up in the price of every day consumer goods. That includes the “veggies” you dismiss as unimportant, but also countless other consumer goods, from cars to TVs to utilities to toilet paper to otherwise worthless Advanced Macroeconomics textbooks.

        None of this rules out a brief period of stagnant consumer prices. I would not be surprised if the official CPI measures to fall to near zero or slightly negative in the coming months. But that will be short-lived, because such a development will ignite even more fears of DEFLATION!!!!! *insert scary music and Bishoftu’s agonized screams here*, which will trigger even more frantic money creation by central banks.

        Now add in major supply chain disruptions, increasing protectionism as countries repatriate vital manufacturing, medium-term agri-food production constraints, massive government spending increases and increasing taxes to pay for them, and you’ve got plenty of avenues by which all that excess money will find its way into prices, regardless of unemployment levels or incomes. If you’re old enough to remember the 1970s – hell, if you’re old enough to read about the 70s – then you know that the Keynesian assumption that inflation and recession cannot coexist is a fallacy. That is not a matter of economic debate; it is the historical record.

  11. “All that excess money will find its way into prices, regardless of unemployment levels or incomes”……..Ragingranter

    Unfortunately you are not getting this at all. And I know that because you are falling back on the standard explanation that government “printing” equals devaluation of the currency and is therefore inflationary. Don’t you wish. Maybe it will save your job and your house if that comes true but I have bad news on that front and here it comes.

    The level of capital destruction taking place in the economy right now runs far in excess of any band-aids that the authorities are adding to the system in the form of ginned up money off the printing presses. The reason is that most money is not money at all. It is asset valuations and it is theoretical.

    Houses and stocks are a perfect example. When they go no-bid the bottom can fall out and all that theoretical wealth just vanishes. So the economy as a whole is much poorer and it is a fact that many trillions of dollars have already evaporated since we all went to lock down. The US stock market alone lost 6 trillion in value in 6 days in February. Business incomes have declined by many more trillions. Salaries and payments to workers have declined by equal amounts and we can speculate on housing once the numbers start coming in but its going to be a very large figure.

    Trillions in losses across North America.

    So no, these current infusions by the Federal Reserve and Bank of Canada are not going to be inflationary at all, let alone hyper-inflationary. To make matters worse it is very typical for consumption to decline sharply during a contraction of this magnitude since people become fearful. Social mood sours. They don’t chase goods and drive up prices at all. What happens factually is that savings rates rise sharply and the deflationary impact is magnified. And what you get is stories on the internet about people knitting their own sweaters or making home made jams instead.

    That’s how we deflate. That’s why home values will actually crash rather than wilt and go flaccid. Even the banks are in trouble now. So you need to put aside the theory of inflation creeping into the shops since that is not part of the record except in cases of serious shortages. The few trillions that have been spent around thus far do not put a candle to the level of capital destruction we are witnessing on every level imaginable. Money is being destroyed at the wholesale level and its disappearing faster than the banks can print more even at a time when credit is tightening like a vice.

    The hole blown in our economies is unfathomably deep.

    And the best bits have not even started yet. The bankruptcies and insolvencies and defaulted bonds. If you expect to have any hope of surviving what is coming you need to get that foolish idea about inflation out of your head as quick as possible and start storing up some nuts for winter. You need cash and lots of it to get though what is coming next. Not because prices are going to be higher but because money is going to actually be scarce.

  12. Deflationary short-term, hyperinflationary medium term.

    • Raging Ranter

      I expect there will be some 70s-style stagflation. The inflation of the past decade has been conveniently sandboxed in asset markets – stocks in the US; bonds and housing everywhere. Neither real estate nor financial securities are included in consumer price indices. Whatever inflationary pressures remained were exported to poor countries via off-shoring of more and more of our manufacturing base. These factors allowed central banks to pretend that their money creation was not causing inflation. In the book he wrote shortly before he died, the great Paul Volcker referred to asset bubbles as “a close cousin of inflation.” He could have gone further and called them maternal twins.

      With the credit cycle over (our Minksey moment has arrived) and asset markets now deflating, the excess money is going end up somewhere else. Like everywhere else. Now throw in the fact that globalization has suddenly reached what looks like a very hard ceiling. This will cause supply constraints. Keynesians don’t like to admit that aggregate supply can shift backward at the same time aggregate demand falls. (Their flawed Phillips curve is entirely focused on the demand side.) If aggregate supply shifts backward faster than demand, then consumer prices go up, regardless of the unemployment level. And that is how monetary inflation will find its way back into the CPI.

      In a way it’s a blessing – central banks will no longer be able to pretend they are white knights fighting off the deflation boogieman; not if consumer prices are rising in our faces every day. Inflation has been there all along, it’s just been hiding in asset markets, or exported to third world manufacturing hubs. I suspect the collapsing debt bubble and coming de-globalization will force that inflation out into the open, in the same way Nixon’s tariffs – and the retaliatory trade barriers and oil price shocks that followed – did in the 1970s. Like today, the monetary inflation in the US was already there, especially after Nixon ended gold convertibility. His protectionism, and the Yom Kippur War and oil embargo, quickly transmitted that inflation to sticker prices across the globe.

      • Excellent points. I wonder: how to position oneself best? Equities — particularly high-quality business with pricing power — have historically offered the best protection against inflation. However, I would bet that stocks have further to fall; possibly much further. They were flying high relative to fundamentals for a long time, and history shows us that markets tend to overcorrect as fear supplants greed. There could be some amazing opportunities on the horizon.

      • Raging Ranter

        That’s the big question. Some equities could offer great returns, but they’d have to be specific equities. My stock picking has always been abysmal, so I don’t even try anymore. Overall, stocks did not do well in the great inflation from 1969-82 (terrible in real terms) so I don’t think index ETFs would be the way to go.

        For the past year, I have been 85% in GICs paying anywhere from 1.6% to 2.2%, with the remaining 15% or so in options positions, mostly long-dated call options on precious metals mining stocks. I’ve done well with that strategy so far, but I’m no gold bug. I’ve had my ass handed to me by gold and other PMs too many times in the past; I really don’t trust it. That’s why I’m in options and not the underlying stocks. Options give me a far better tool for locking in profits and limiting downside exposure than owning the underlying stocks ever could.

        At some point, when I feel gold is getting too bubbly, I’ll do the opposite and buy some out-of-the-money puts on PM miners to try and profit from the inevitable bust. Even if gold doesn’t collapse, just the volatility caused by a temporary mid-bull market correction can be enough to boost put option prices and turn a small profit.

        Eventually, there will be opportunities to buy call options in other equities that are looking bullish, and puts on equities looking too inflated. As for current shorting opportunities, I’ve given up trying to buy put options on any Canadian banks. Sentiment is so bearish right now that even distant out-of-the-money puts are insanely expensive, making the profit potential too limited. The time to do that was January or early February when out-of-the-money puts on Canadian financials were selling for peanuts. If only I had.

  13. I am stuck in moderation.

  14. Lordy, it’s hot in here!

    Today I spent 2 hours trying to talk a couple off a cliff. They are hell bent on buying a house they cannot afford, while interest rates are low and price are “down”.

    Good grief! (and there will be if they get their way…)

  15. white_angelo

    if this all takes down the ccp, we’ll look back and agree it was such a small price … as for all the asset value stuff, don’t over-think it … (1) count on the system-hierarchy-tptb changing whatever rules it needs to maintain control – lock … (2) while the effects won’t be uniform, 1 means paper currency is going to be worth less in real terms – lock … (3) gold is very under-owned and does well in uncertainty – lock … (4) beware the volatility – in everything – it’s not done – cash buffer to not force liquidate the wrong stuff at wrong time (5) if there’s stupid long-term financing at stupid low rates to acquire something real, useful and productive, why not? cb’s are backstopping everyone’s stupidity – how about co-opting for your anti-stupidity … until proven otherwise, 1-5 works

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