Making sense of the markets this week: June 21, 2021

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

The Canadian housing story and a “bad” business idea

The Canadian real estate boom (or crisis, for those looking to get in) has been one of the big headlines of 2020 and 2021. Housing prices have soared out of the reach of many first-time buyers. 

When I read this post (paywall) and headline that offered… 

“Condo developer plans to buy $1-billion worth of single-family houses in Canada for rentals”

I just had to respond with…

I might suggest that I’m largely for free markets, but I guess I’m not. Not in this case. 

When we take more home ownership opportunities off the table and turn them into rentals, that obviously affects the supply and demand imbalance. That will make it harder for first-time buyers who want to own, rather than rent a home. 

I’m not a fan of this opportunistic real-estate business idea—but if you disagree, feel free to jump on that tweet and comment. 

There are perhaps a few strings regulators could pull to attempt to cool the housing bubble—and it certainly feels like a bubble, largely created by artificially-low interest rates for an extended period. 

Canada is among the “top three frothiest housing markets,” and is flashing warning signs not seen since 2008. (New Zealand and Sweden round out that frothy list.) In that post, Bloomberg economist Niraj Shah offers… 

“A cocktail of ingredients is sending house prices to unprecedented levels worldwide,” economist Niraj Shah wrote in the report. “Record low interest rates, unparalleled fiscal stimulus, lockdown savings ready to be used as deposits, limited housing stock, and expectations of a robust recovery in the global economy are all contributing.”

A newly-released Manulife debt survey and study frames the scenario for new buyers. 

“Home ownership is now out of reach for about three-quarters of Canadians, as  housing prices reach a record high and continue to rise….

“Housing prices have hit an all-time high and are rising in all corners of the country with no end in  sight, making home ownership increasingly difficult for many Canadians. Three-quarters (75%) of those who do not own a home want to own one but can’t afford to. Two-thirds (67%) worry  about housing prices in their local community, suggesting they believe they might have to move to another community if they decide they want to buy a new home. Seven out of 10 Canadians (71%) who do not own a home worry about saving up for one, including as many as four in 10 (39%) who worry a lot about this.” 

And here’s another twist that, if it happens, would add insult to injury on the out-of-reach front., citing Desjardins, suggests mortgage rates could increase some 40% by 2024. That would significantly increase borrowing costs and would take many potential buyers out of the market. 

The wrap on that post sums it up nicely… 

“Since a number of factors go into a forecast, the longer the date, the more uncertainty it faces. Economic conditions would have to worsen and inflation drop for rates to fall. For rates to rise, Canada would have to continue a strong recovery, and/or see higher levels of inflation. Canada is so dependent on housing now, we likely have many people cheering on a crash to keep rates low.”

COVID is a wild card for the economy’s grand reopening

Much of the world has been in the grip of the virus for some 15 months. It dictates the way we live. It dictates the way we work. 

There is great optimism today as we work our way to the “other side” of the first modern-day pandemic. That optimism is made possible by very successful vaccines that can only be described as miraculous. We might now take the vaccines for granted, but we should remember that vaccines usually take several years to develop; the life-saving vaccines of today were produced in several months. 

COVID cases, deaths and hospitalizations are dropping at rates that are more than encouraging. The vaccines are working. 

Given that success, we have our cash and credit cards in hand, ready to take advantage of the grand reopening. And we want to buy experiences more than things

We can’t wait to travel, visit restaurants, hit the gym and fitness classes, get a haircut, see friends and family. We want to get back to normal. 

That said, the virus is not taking all of this human optimism lying down. It’s learned to pivot by creating “variants of concern.” The variants are known to be more transmissible compared to the original version of the virus. 

So, the pandemic has not yet been cancelled, as evidenced by some Royal Caribbean ships that won’t sail. Royal Caribbean cruise lines have pushed back cruise dates after eight crew members tested positive for COVID. 

From that Seeking Alpha post… 

“The cruise line operator says all 1,400 crew onboard Odyssey of the Seas were vaccinated on June 4 and will be considered fully vaccinated on June 18. All crew members are being quarantined for 14 days.” 

International travel may not be the breeze that many hope or expect. Many suggest we won’t really be able to get back to normal until most of the world is vaccinated. While Canada leads developed nations with first-dose vaccination levels at over 65%, the global level is just above 20%. From that CTV link you’ll see almost 75% of those who are “vaccine-eligible” in Canada have received at least one dose. Canadians are rolling up their sleeves in a big way. 

There is the potential for the virus and all variants to continue to spread as more humans (carriers) move around the world to where vaccination levels are quite low. 

And how much tolerance will businesses and health officials have for infection levels? Will travel and entertainment and gatherings be cancelled due to a few cases even if cases are asymptomatic? Will those of us who are “double vaxxed” get special treatment over those who are not fully vaccinated or over those who chose to not get vaccinated? Will they be second-class citizens? 

There appears to be no set policies on the grand reopening. And any policies will be rolled out industry by industry, county by country, and perhaps company by company. 

When it comes to COVID, the reopening and travel, we are flying by the seat of our pants. 

I’ll keep an eye on the Caribbean Cruise dates, and other COVID cancellations and policies.  

There may be many surprises for some of the recovery stocks and recovery sectors, including travel. But it might be a sensible consideration for people who like to play some obvious trends with their portfolio “explore money.” 

Many investors are on board. The Harvest Portfolios Travel & Leisure Index ETF has attracted more than $200 million. The ETF is passively managed and follows the Solactive Travel & Leisure Index, which tracks the 30 largest global travel-related companies by market capitalization.

It appears the grand reopening is underway, but COVID will still be the tail that wags the dog. Getting to the other side of the pandemic will be exciting and more than interesting. 

Canadian inflation numbers

Canada’s annual inflation rate accelerated at its quickest pace in a decade, influenced by the frothy housing market (see above) and supply-chain woes in some industries that are showing up around the globe. That said, we should keep in mind that data points are bumpy, and at times distorted by some very low points of a year ago, as well as the severe effects of the pandemic. That’s called a base effect—starting from a low base. 

The Consumer Price Index (CPI) rose 3.6% in May from a year ago, up from a 3.4% gain in April, Statistics Canada said on Wednesday, June 16. It was no big surprise, and mostly in line with what analysts were expecting. 

The bumpy COVID recovery will deliver some bumpy inflation reports; but, make no mistake, inflation is here. 

From this Advisor’s Edge post

“Statistics Canada said the average of the three measures for core inflation, which are considered better gauges of underlying price pressures and closely tracked by the Bank of Canada, was 2.3% in May, up from 2.1% in April. The reading in May was the highest seen since April 2009.” 

And on the direction of rates… 

“Bank of Canada governor Tiff Macklem has said the bank intends to keep its key policy rate at 0.25% until the economy has recovered and inflation is sustainably back on target, which is expected to happen in the second half of 2022.”

This might be a tricky or dangerous game of inflation chicken. We want higher inflation and we want the inflation spikes to be transitory. We won’t know until we know. 

And, south of the border, The Fed is changing its tune, or at least the pitch. “There’s never a dull day when Jerome Powell comes to town.” From that Seeking Alpha post… 

“On Wednesday, the Fed raised its expectations for inflation considerably, saying the headline figure could reach 3.4%, marking a full percentage point higher than its forecast in March. While Powell still feels the price pressures are ‘transitory,’ it may now take some comforting numbers to reassure investors.”

The central bank bumped up the time frame on when it will raise rates. Originally, we were looking at no increases until 2024. Two hikes in 2023 might now be on the table. 

Last week, we showed that stocks and bonds are buying the transitory inflation argument. 

Markets were briefly spooked on Wednesday, June 16, by the change in tune, they recovered on Thursday, but on Friday they were having a rough time, with U.S. stocks down over 1% into midday.

And a last note on inflation: Are higher oil prices a one-year or 10-year event? From that Yahoo! Finance post… 

“Vitol’s Hardy predicted that oil consumption will continue to rise for years to come, reaching 105 million to 110 million barrels a day by 2030. Under-investment caused by last year’s price slump means ‘there is going to be a gap between 2025 and 2035 in terms of supply and demand’.”

Higher prices won’t fix higher prices without investment.

Pipeline reports: winning and losing

The energy reality suggested above might bode well for Canada’s major pipelines. As much as we might want to see a swift and sensible green energy shift, it appears obvious the demand for oil and natural gas is not going away any time soon. 

Enbridge and TC Energy, Canada’s two largest pipeline and energy companies, move much of that oil and gas around North America. 

Recently, Enbridge won a Minnesota State court ruling. TC Energy threw in the towel. 

From that BNN Bloomberg post… 

“Canada’s oil sands producers have struggled for years with a shortage of export conduits as projects to build new ones face increasing scrutiny from courts and regulators. U.S. President Joe Biden, on his first day in office, rescinded a permit for TC Energy Corp.’s Keystone XL pipeline that would have helped increase shipments of Canadian crude to the U.S. Gulf Coast. The company last week finally cancelled the project after more than a decade since first proposing it.”

It’s long been reported that the big pipeline and Canada’s oil producing industry don’t ultimately need Keystone XL. From that post… 

“According to projections from the Canadian Energy Regulator, the combination of the Trans Mountain Expansion Project, Enbridge Inc.’s Line 3 replacement and Keystone XL—along with existing pipeline capacity—would exceed total Canadian crude export demand through the 2050 forecast horizon.”

Oil usage is obviously based on demand, not pipeline capacity. And the oil will find its way to where it is needed. 

I’ve held Enbridge and TC Energy (formerly TransCanada Pipelines) for 15 years or so. They offer very generous dividends and incredible dividend growth histories. They are staples in the portfolios of many Canadians who build simple stock portfolios.  

To my eye, they still look like wonderful long-term investments. 

And from my readings and research (and from management), they will also play a role in the energy solution. 

Dale Roberts is a proponent of low-fee investing who blogs at Find him on Twitter @67Dodge


The post Making sense of the markets this week: June 21, 2021 appeared first on MoneySense.

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