Reality

As the first shots of vax enter the longing arms of a virus-weary nation, there is hope. By next summer the herd may be dosed enough for life to seem normal. Let’s hope. This has been a dark time, although we always knew the pandemic would be temporary.

But what about the residue?

There’s some evidence the economic and financial damage of Covid could be, well, permanent. For example, the national debt will have doubled by the time this is over, and stand at an incredible $1.4 trillion. In a country where there entire economy’s only $2 trillion in size, that is daunting. Besides, family debt now exceeds $2 trillion – so add that in. (The household debt ratio just soared to 170% of income.) And did I mention the provinces? No? Well, they owe another $700 billion – half of it Ontario alone.

None of this is going away, or being paid down. In fact the feds have plans to spend another $100 billion on re-engineering the economy (whatever that means) in the immediate post-Covid years. That scares the Parliament Budget Officer, who this week said: ““Our labor market projections currently suggest that the size and timing of the planned fiscal stimulus may be mis-calibrated.” Atta boy, Yves Giroux.

But, I hear the rabble cry, all this spending was needed to shield us from the slimy little pathogen, so we could Zoom, Netflix and buy groceries.

Indeed. Mr. Socks doled out more than $250 billion in CERB and other payments. The results are interesting:

• The personal savings rate went from 7% to 28% in mid-2020.
• Personal bankruptcies across Canada plunged
• Food bank usage fell noticeably
• The real estate market caught fire with leaping sales and prices
• Sales of quads, bikes, hot tubs and home reno materials soared
• Personal and business cash savings exploded, says CIBC, to $170 billion

And while the feds were papering over the virus, banks deferred mortgages, credit card companies waived payments and a whole lot of people in low-wage jobs found they had more money in Trudeau largesse than had been in their paycheques, pre-bug.

But what now?

Troubles, maybe. The second wave has hit and it’s worse than the first. Toronto’s locked down. Alberta and the flat provinces are a mess. Cases are rising and Christmas is cancelled. Meanwhile there seems to be a little sober second thought going on in Ottawa after realizing more than 800,000 people who got CERB money may not have deserved it.

Alex and thousands more received this letter in the last few days:

He has no intention of paying anything back, since he didn’t cash the cheques (apparently he had no direct deposit). Alex just wanted to frame them, which he did. All $12,000 worth. In his bathroom.

Who cares about the accumulated debt or our $383 billion deficit this year? Angus Reid found only 23% of people are fussed by it. Nik Nanos last month discovered a scant 11% think the economy’s a top priority. This is why the T2 gang wouldn’t mind an election any time soon. Politicians who dole out money tend to be popular.

Of course, the dopamines won’t be swimming through our veins forever. Never before has this thinly-populated nation faced such a level of indebtedness. And no, kids, we don’t just owe the money to ourselves. If not for historically-ridiculous interest rates, what’s just happened in 2020 would be economically devastating. The cost of servicing such an alpine of debt would suck off a serious amount of government revenues.

But rates will stay this low forever, right? Many believe that. And they err.

As the virus fades, economies expand and GDP reflates, inflation and higher rates will materialize. There will be a giant economic stimulus bill soon in the States. Vaccines are starting to roll out globally. The Biden guys will spend up a storm. Central bank bond-buying will end in a while (already being tapered back), allowing yields to rise. Global growth will resume in the next two years, commodity prices will swell and investors will be demanding a premium for owning oceans of debt.

As mortgage broker/blogger Rob McLister warns:

By the time COVID case counts start heading in the right direction and enough people are vaccinated, both of which should happen by spring-ish or summer, say analysts, the market could start pricing in Bank of Canada policy tightening. That will be a signal to investors to take yields higher (i.e., sell bonds). Higher yields mean higher fixed mortgage rates.

He also points out that while this damn Second Wave is brutal, bond yields have not been dropping as they did during the first viral assault. “When bad news doesn’t hammer yields, it often suggests the market is gearing up to run in the other direction.” Exactly. Everybody in the financial world knows where this is headed. You should know it, too.

So pay back your CERB by the end of the month or be prepared for CRA grief. Lock in your mortgage rate, too. Maybe there are a few more basis points yet to save, but we all know a year from now these deals will be so gone. And make sure you have a nice pile of rate reset preferreds (or a good pref ETF) in your portfolio, constituting half the fixed-income component. They pay close to 5% for just sitting there, and will jump in capital value as rates back up.

Oh yeah, be careful who you vote for. Nothing’s free, and reality bites.