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        No good choice

        The terrified, the prudent, the father-knows-best crowd want the economy to stay shut. Polls show most Canadians, scared and pliant, agree. But a vocal minority cry the vulnerable should be protected, the health care system bolstered and adults allowed to assess their own levels of risk. In other words, turn the thing back on.

        Both views have been expressed here. The debate will intensify. Meanwhile it’s becoming clear just how pooched our population is.

        We know six million people applied for government emergency income support – about a third of the entire workforce, unable to survive a single month without pay. And we know that as of two days ago, Ottawa had already shipped $20 billion out the door. Never happened before.

        But evidence is emerging a huge number of homeowners are unable to carry their properties, living paycheque-to-paycheque, and now just kicking their debt Waterloo down the road. If the virus hangs around for, oh, six months, real estate is in serious trouble. Obviously a lot of people own properties they could not actually afford.

        Check this out:

        • Over half (54%) of homeowners have asked their lenders for mortgage assistance, like payment deferral, according to a Forum Research poll. Says mortgage broker/blogger Rob McLister in response: “Given 60% of homeowners have mortgages, that’s the majority of people with mortgages. It’s hard to wrap one’s head around that high of a number given most people have jobs and fallback resources…But suffice it to say, a lot of people feel they’re in need of mortgage help.”
        • Six per cent of people have already missed a mortgage payment, while 14% of renters couldn’t pay their landlords. (Over half of all renters asked for relief.)
        • Somewhere between 600,000 and a million homeowners have requested, and received, six months of payment deferrals. This is costing the banks close to $1 billion in monthly cash flow, and all of that money is being added to the debt that families will have to finance.
        • One bank alone – CIBC – has approved 250,000 deferrals and payments on $20 billion worth of home loans, credit cards and LOCs. The woman in charge of banking operations is frank. She calls it “toxic.”

        “We do have a highly indebted Canadian consumer that we’ve been talking about for quite some time, and just under half of Canadians live paycheck to paycheck,” said Laura Dottori-Attanasio. “If you add that people are no longer working and generating cash flow, I do think it makes for a toxic combination that’s going to be much more difficult to overcome the longer this takes to resolve.”

        There is little doubt the combination of sudden, virus-inspired unemployment and irresponsible personal debt poses a structural risk to the Canadian economy. Add in oil – this week worth nothing, or close to it – plus the public’s reluctance to allow businesses and workplaces to re-open, and things darken more.

        You cannot blame some schmuck with a house, two kids, a mortgage and no pension for losing his job to Covid-19, but you can hold him accountable for having no savings, resources or resistance plus a steamy pile of debt. All those warnings about 50% of people living within two hundred bucks a month of insolvency were apparently correct. When the inevitable shock came, they folded.

        Now it’s all about timing. “The length of this crisis,” says the bank exec, “is going to be probably the most important determinant in terms of what things look like in the future.”

        All true. And this is why leaders need to make choices. Quick ones.

        Complicating it all is oil. What a disaster. Prices were negative Monday and barely positive Tuesday. What cost $50 just a hundred days ago is now changing hands for a few bucks. Cars are garaged and gas demand is down 35%. Air Canada just parked all is US-bound planes for a month. Porter hasn’t been flying for weeks. Factories are shut. The world is using a third less energy thanks to the virus, and there’s no place left to put all the oil.

        So what?

        This is deflationary. So is the virus. So is the fact hundreds of thousands have stopped making mortgage payments. Or buying houses. Or earning an income. Or spending money in stores. Canada’s GDP will crash 14% in the second quarter, says Capital Economics, compared to a -12% decline in the States. The bounce-back will be impressive when it comes – but with most Canadians wanting the lockdown to continue into autumn, the trauma will probably worsen.

        Who survives deflation?

        People with money, not debt. Oh boy.

         

        Wusses?

        It’s hard to imagine anything losing 40% of its value overnight. But that happened to oil. What a mess. And while that was sending Alberta’s premier into a raging Tweetstorm, people in NS were trying to understand a mass murder. On top of a pandemic.

        These are not easy times. I thought about that as the SAVD (Self-Anointed Virus Cop) who lives beside the park yelled at me again when I walked Bandit along the edge of a deserted field. ‘Go home,’ he screamed. ‘And stay there.’ I ignored him. Bandit, too. He’s deaf now. We walked on.

        Did you see the poll today?

        While angry protests against lockdowns, quarantines and empty businesses erupt in the US, Canadians are reacting in a far different way. Is it our cautious nature? Or all the new money Ottawa is sending households? Look what the Angus Reid survey found: close to 80% say it’s too early to open stores or workplaces. Almost a third believe we should stay locked at home until sometime between July and October. And even if restrictions were officially lifted, most would choose to continue self-isolation. At home, in their yards. Yelling at guys walking dogs.

        Source: Angus Reid

        Our political leaders and the media did a fine job of scaring the crap out of us. Polls found that by two weeks ago 70% of adults believed they’d get the virus and 60% felt their symptoms could be severe. So far 0.094% of Canadians have tested positive and of those 4.5% died. Most have been the aged, with about half being nursing home patients. Globally 96% of folks who get the bug experience mild symptoms. But the fear of death has apparently reached 100%, so the economic consequences may be more profound than we all suspected.

        The virus has shackled economic activity, crushing the demand for energy and leading to oil prices that hit $10 US, then went into free fall – to less than zero for futures on Monday (crude was over $50 a few months ago). Negative oil. Astonishing. It’s ugly for Canada, where the black stuff remains our biggest export. No wonder Jason’s head is imploding. But an even bigger component of the economy now is residential real estate, and that’s where Monday’s poll really bites. The oil-house combo suggests Canadian economic recovery could be a lot slower than that of the States, where authorities (and citizens) seem more willing to let the virus spread through the herd. That may be logical. It may be suicidal. Time will tell.

        What do these things mean for investors?

        Social pressure’s likely to keep Canada shuttered until well into the summer. Maybe longer. The odds of a pile of small businesses not opening again – despite Ottawa’s payroll subsidy and zero-interest, partly-free loans – are 100%. If the restaurants and bars do swing open, customers may be too chicken to flock back. Theatres, concerts and sporting events are toast. This will be a year without vacations, condemning Airbnbs, festivals, hotels, tourist destinations and artists. The cruise business is kaput, which hurts both coasts. Airlines will stagger back, but the restoration of lost routes will depend on demand – which is based on public confidence (and as of today everybody must wear those damn masks).

        In short, in an economy where two-thirds of all GDP is dependent on consumer spending, what people believe, matters. So when 77% says, ‘keep ‘er shut’ you have an idea of what to expect.

        Given this fear – valid or not – how do you invest?

        First, look at this gauge of consumer confidence in Canada. Yikes,

        Source: Nanos Research, Bloomberg

        When so many are fearful, the world brims with opportunity. That should go without stating. But people too afraid to go out of their houses to earn a living are unlikely to be astute investors. Hence anyone looking to buy a house from a virus-motivated vendor will probably do well. People on the market now are highly motivated. Capital Economics said Monday houses prices in general will fall 5% during the pandemic. That’s probably light – but still means $75,000 off the average Toronto pile.

        In terms of a financial portfolio, look at the beaten-down energy sector. Amazing. Given the economic contraction in China and the big hole coming in US GDP (maybe 30-40%), demand has crashed. The oil supply depots are full. It’s not worth digging the stuff up. The decline is historic. We were back to prices of 20 years ago on Monday morning. By afternoon the stuff was worth less than nothing.

        This will change. The economy will rekindle, and the world still runs on oil, despite Mr. Musk. My fancy portfolio manager and analyst buddy Ryan says crude at $50-60 a barrel in 2021 is a definite possibility, once the surplus inventory is burned off. “I believe we’re close to the bottom.” So when something everybody needs loses 100% of its value in four months, guess what you should do?

        There’s more. Look at poor REITs, pummeled because of the virus’ impact on commercial landlords and office towers empty of cubicle slaves. That will change. The world may have more online shopping and remote workers going forward, but this prime real estate will continue to pump out income. And then there are the poor preferred shares, yanked lower in terms of market value by central bank interest chops. The yields are delicious (near 6%), and it’s a certainty rates will gradually augment as economic activity resumes over the next two years. Tax-efficient capital gains happen when you buy low and sell high. This is low.

        Will most people miss this stuff? You bet.

        Will they stay home, scared? Yup.

        Will they overstate risk? Guaranteed.

        And they shall reap what they sow.