Juggling Dynamite

All types of debt have exploded in recent years due to indiscriminate lending and appetite for excessive borrowing which enabled an epic wave of real estate speculation and household spending.  This was always doomed to end in a firestorm of defaults and contracting credit. COVID-19 has presented an overdue spark.

How has COVID-19, job loss, declining income, and physical distancing impacted the mortgage industry? And how are home values going to be affected by all this? Enter Ron Butler. Ron is a seasoned mortgage broker and a first-time guest on the Debt Free in 30 podcast. On today’s show, we discuss the current real estate market and what will happen when the lockdown is over; why banks are tightening HELOC availability for borrowers; and why now may not be the best time to refinance your mortgage if you are carrying unsecured debt. Ron also provides insight into the ‘death’ of the private mortgage industry and describes the new world of mortgage lending. There’s lots to learn from this mortgage insider.  Here is a direct video link.

Not just in Canada, see Here’s why it’s much harder to get a mortgage, or even refinance.

Danielle was a guest with Kerry Lutz on The Financial Survival Network, talking about recent trends in the world economy and markets.  You can listen to an audio clip of the segment here.
Listen to “Is the Worst Yet to Come? Danielle Park #4726” on Spreaker.

As shown below, the 23% rebound in equity prices since March 23 has returned the S&P 500 to a short-list of the least attractive valuations in history at 19x forward earnings estimates, and equal to the market top on February 19.  Canadian equity valuations have followed along for the ride.  In short, from present levels, investment prospectives remain among the bleakest in a century.

This is especially true since we are entering the deepest global recession since the 1930s with record job losses, business failures, loan defaults and lost earnings all in the mix. The chart below shows the 100% probability of a U.S. recession now underway in 2020, as in 2001 and 2008.
Recessions do not clear quickly, no matter how aggressive policy interventions may be.  As shown in the table below from Hedgeye, recessions historically come with median bear markets of -42% over 18 months.

The three previous times when we headed into a recession with stock market valuations (CAPE) in the 90th+ percentile, as in February 2020, the drawdowns have been 49 to 86% over 21 to 34 months, followed by years trying to grow back losses. Financial decisions and capital allocations should be managed within this context.