Bliss

Spring. Hormones. Flowers. Rutting season. Running of the saps. Given the retreat of the snow and the coming of warmth – and the fact this blog has been dour and prickly of late – let’s rock. Herewith, a few things to send you into the weekend blissed, not pissed.

No recession. Not even close.

That was the word Friday from the eggheads at Scotia economics. Remember that “inverted yield curve” that had all the Nobel-winning macroeconomists on this blog convinced we were heading into a recession, with suicide the only reasonable option? Turns out it was a false alarm.

The bank confirms what my Porsche-driving, trophy-wife-hugging fancy portfolio manager colleagues have been saying for a while. The upside-down yield curve predicts nothing. Not with certainty. Especially when it comes to Canada. Short-term rates have moved higher than the yield of long-term bonds lots of times. And. Nothing. Happened.

Check out this bit of history:

“The curve has been inverted for 75 out of 148 years since the start of the historical data set in 1871. Since 1950, the curve has been inverted 21 out of 68 years or about one-third of the time. So clearly the frequency of recessions before the post-WWI period distorts things, but either way, the slope spends much more time inverted than the US economy spends in recession.”

The recession talk was overdone and based on flawed data plus weak minds and a lot of evil people on BNN who exist to scare you. Ignore them. The bank says economic growth will continue in both Canada and the US, job creation will remain strong, Trump will hump everything he can to push markets higher, while more trade deals, a softer Brexit and rising commodity values will keep the party going.

The forecast: one more Fed interest rate hike by early next year. One Bank of Canada increase this year and another in 2020. As for a rate cut: “At this point that would seem to be an absurdly unwise frittering away of precious bullets that may be needed to counter potential future problems.”

As stated here recently, if you want a cheap mortgage then take advantage of the current competition and some crazy-low rates. You could be waiting years for anything better.

Mr. Market’s laughing at you

…if you listened to the Chicken Littles and bailed out of perfectly-good investment assets last Christmas, that is. All that moaning and gnashing about markets going to zero, about a new 2008-type crisis and the wisdom of cash turns out to be wasted emotion. This pathetic blog told you in the final months of 2018 to ignore the noise, stay the course and maintain a balanced and diversified portfolio. We gave you examples of scared people who sold assets into a storm, turning a paper loss into a real one. Bad move, we said. ‘Not so fast,’ the rabble roared in response. ‘She’s going down…’

So here we are at the end of Q1, 2019. The noise has ended. The sun came back. The economy grew. The markets roared. A balanced portfolio – down maybe 3% after the big sell-off late last year that clobbered stocks – has swelled 7% or so in the last 90 days.

For the year to date the TSX has gained 12%, the Dow is up 13%, the S&P 500 has jumped 15.8% and the tech-heavy Nasdaq has advanced 20%. For the past 12 months Bay Street is up 11% and Wall Street has added 10%.

Hope you didn’t give this up for a 2-3% GIC with fully-taxed returns. Next time don’t fall for it.

Never, ever short the banks

That’s a lesson many are learning, and more will soon. Canadian bank stocks have jumped close to 10% this year, at the same time silly investors have bet hundreds of millions against them through short-selling. (Shorts borrow stocks they think will decline, sell them, then hope to buy them back at a discount later, returning them to the broker and pocketing the difference.)

The shorts have fallen for the meme that Canadian real estate will crash since households carry staggering debt, mortgage originations have collapsed and the big banks will see earnings tank as a wave of defaults washes over them.

Of course, ain’t happening. The market will melt, not crash, with softening sales and prices. A lot of families will slip underwater on their loans, but they won’t walk. People would rather eat drywall than surrender their keys. Besides, most mortgages in Canada are recourse loans (no jingle mail) and CMHC backstops the lion’s share of high-ratio borrowings. Moreover, the banks have had a decade to prepare for this, and have greatly expanded their operations to non-residential real estate areas.

So, the Great White Short, as it’s known, is a bust. Without some dino-killing eco-event taking place, Canada’s banks will continue to make oodles of money, propel Bay Street higher, and pay investors fat, tax-advantaged dividends

So, lighten up. Go out and romp. Remember the sun screen.