Juggling Dynamite

It is a classic financial error to put funds that are needed for operating expenses, or a capital purchase like real estate, or another asset, into publicly-traded financial products like equities, corporate debt (or funds and ETFs of them).

Unfortunately, many people have been foolishly doing this in recent years, and now, as financial markets tank, funds needed for near term costs and real estate contracts, are evaporating.  This magnifies the contagion from financial markets through other parts of the economy.

At the same time, lower revenues and wages, rising unemployment and a looming recession should naturally make buyers less inclined to take on larger amounts of debt and spending.

We are only a couple of weeks into what is likely to be at least a few quarters of intensifying financial strain here, and already people are missing large chunks of the funds they need to function and complete realty contracts.   See ‘Prices are not going to go higher’:  COVID-19 expected to put a chill on the spring housing market:

“Up until three days ago, this virus was having no impact on the housing market,” saidJohn Pasalis, President of Realosophy. “Then suddenly, we start getting all these calls, people sounding anxious and wondering what their next move should be. I got a query from a couple who are worried about their pre-construction condo and are wondering if they should assign it,” he told the Post.

…When the markets started crashing at the end of February, my younger clients were panicking because many of them were relying on their investments for a downpayment,” he said…

Janet (not her real name), a 33-year-old living in a two-bedroom condominium in downtown Toronto had been hoping to upgrade to a home, partly relying on investments in her TFSA. But the market crash has severely disrupted her plans of upgrading — she told the Post she had lost about $14,000 that she was counting on for a downpayment.”

This is the very definition of inept financial planning, and any ‘advisers’ who have been endorsing such an approach, should be jettisoned.  Wake up, people!

Propaganda has a long tradition and more reach today than ever in human history.  We are all susceptible.  This documentary is a worthwhile review.

Why are we so easily seduced by propaganda? Propaganda: The Art of Selling Lies traces the history of the art of persuasion from ancient cave art to the present, where we are bombarded by more propaganda than ever before. Featuring contemporary artists including Kent Monkman, Shepard Fairey, and Ai Weiwei. Viewer discretion is advised.

Here is a direct video link.

A big bounce this morning affords another opportunity to review capital risk for the masses who have come into this downcycle imprudently exposed, unprepared and illiquid.

The damage of the past week has been dramatic and widespread and the knock-on effects are not yet fully evident for many funds, managers and traders.  Fallout is in motion.

Moreover, given the epic leverage cycle top for the history books –just three short weeks ago–it is also highly likely that the mean-reversion cycle here has significantly further time and downside yet to run.

My partner Cory Venable’s chart below of the Canadian TSX Composite since 1995, offers a big picture view of where we are at, so far, compared with the last two market cycles (rectangles on left), which were also marked by record central bank intervention, excess liquidity and rampant financial speculation.

As shown below, the 28% drop since February 20 retraced the TSX to levels it first reached in October 2006–over 13 years ago.  This is a strong start; but potentially just halfway through the full cycle decline now in motion.

Moreover, it should be noted that excessive debt-weight, demographics and exhausted monetary gimmicks suggest that the recovery from the final bottom this cycle will be a multi-year “L” shaped formation rather than a “V”.  This will prove extra harsh for those who suffer big losses and have no meaningful cash to redeploy when prices are low and yields finally worth buying.

If your financial plan does not contemplate and allow for such outcomes, it is not sufficiently robust, nor likely to serve your needs in the years ahead.  It’s not too late to fix that.