Juggling Dynamite

We have encountered several people in the past year who have been gutting the equity in their homes via mortgages and ‘Home Equity Lines of Credit’ to speculate on other properties and security portfolios. Often they are doing so on the ‘advice’ of their bankers, mortgage brokers, realtors and stockbrokers, financial planners’and even accountants. Others have taken How to get rich seminars with HGTV celebrities like Scott McGillivray (similar to the Trump ‘University’ courses that people were paying thousands to take a few years back).  Sales puff designed to profit off the gullible.

All of this great for enriching those collecting fees and commissions on the transactions, and most likely to be financially devastating for those doing the buying and so called investing.  It has also set up for the next liquidation sale coming, where present holders become stressed sellers and those with cash can pick up assets for pennies on the dollar.  This has been an extra long up cycle, so we should expect the correction phase to be equal and opposite in the other direction.  Lots of good insights in this clip.

Scott Terrio, estate administrator at Cooper and Company, joins House Money to discuss the dangers people can get themselves into when usnig HELOCs.Here is a direct video link.

Meanwhile, the policies aimed at curbing rampant speculation in realty markets seem to be taking a hold in Ontario. This chart of months of inventory at the current rate of sales in Greater Toronto Area cities in June (orange) versus March 2017 (blue), offers a glimpse of rapidly changing supply dynamics.  What goes up on excessive credit, tends to mean revert just as aggressively.  Much more to come.

The trend of 20 and 30 somethings returning to their parents’ home has been well noted for the past few years.  Frequently older generations will comment that today’s young seem to lack ambition or drive since they keep living with their parents.  Which misses a huge part of the equation here.  It’s not drive that’s lacking in most cases, it’s financial ability which is being impaired by some major macro factors.  To wit:

1. Tight and competitive job markets (extenuated by slowing consumer demand in the west, automation, globalization and under-saved boomers living and working longer than past generations), mean that young people are required to have post-secondary education for most job opportunities.
2. Post-secondary education costs are obscenely inflated relative to average income levels for most workers today (aided and abetted by the credit bubble and government-debt underwriting for education loans).
3. According to government data, full-time students in Canada paid an average of $16,600 for post-secondary schooling in 2014–2015. That is more than $66,000 for a four-year program.  In my own experience the past two years, annual costs for full time students living away from home are more in the 25K a year price range–100k for a 4 year program.
4. While 45% of Canadian parents surveyed say that they expect to help with their kids’ post-secondary education costs, most haven’t saved properly for it, and just 14% said they will cover more than 3/4rds of the expenses.
5. In reality then, most kids are paying for all or most of their own education costs.  This means that most end up borrowing, and owing tens of thousands in debt when they graduate into weak job markets.
6. Making matters worse, many young people in need of work and career experience today, are expected to work for free.   Ross Perlin, author of  “Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy,” estimates that of the million or so students doing internships, half aren’t being paid for their work and that includes college graduates according to U.S. News & World Report. [The Labour party in Britian has proposed to make free internships illegal.  More of this to follow].
7. Lastly, the credit bubble of the past 15 years, has allowed housing costs to escalate far faster than wage growth.

All of this means that even where young people are able to successfully complete post-secondary education, most are coming out of school with huge debt obligations, into a weak labor market, facing low and sometimes non-existent wages, on top of ridiculous shelter costs.

So the next time that someone mentions a young person seemingly unable to support themselves, there is much to consider, including some blame to be shared among parents, top-heavy schools and policy makers.

There are no free lunches: debt-enabled price bubbles in education and housing end up costing all of us plenty, including kids that can’t launch and a loss of first-time home buyers, taxpayers and young workers to fund our social programs.  Perhaps now boomers should understand why kids are coming back like boomerangs and Why Millennials won’t be buying your house (at least not at these prices!)

U.S. auto sales peaked in 2016 and fell for a fourth consecutive month in June, while sales in Canada hit a fresh record in the the first half of 2017 on an 8.8% increase in light truck sales thanks to (misplaced?) business confidence in construction and oil.  Passenger car sales on the other hand, declined 2%.  It’s worth noting that passenger sales have been contracting despite unprecedented incentives and give-a ways from dealers.

Consider the below car add from the Financial Post this week.  You can lease a brand new 2017 Mazda 3GX in Canada with $1795 down (0n your credit card) and ‘bi-weekly payments’ of $89 for 5 years.  What is the actual cost of the vehicle?  No one asks.

You can tell dealers are stretching for marginal buyers when they quote bi-weekly payments in case $178 a month sounds too expensive.  And therein lies the rub.  Everyone who would like to qualify for a car loan/lease has done so, even a couple of times, over the past few years.  Now even if auto financing rates could stay at zero forever, there are only so many payments a person can maintain.  With more than $2 trillion in outstanding Canadian consumer debt today and flat wages, even using ‘creative’ financing, discretionary consumption had to hit the end of the cash flow tether.

Meanwhile internal combustion engine (ICE) auto production is booming.  Automotive is now Canada’s largest manufacturing sector, just surpassing fossil fuels. Together these descending products comprise 33% of present Canadian exports (as shown in this table).

And both are running straight into a wall of massive disruption that will decimate demand, revenue and profits, along with Canada’s GDP and government tax collection. This table on the left from the Rethinking Transportation 2020-2030 report penned by James Arbib and Tony Saba, offers a summary of the accelerating transformation of shared, electric, increasingly autonomous, transportation as a service (Taas) now underway.

This is all a critical part of rebooting the world economy toward greater efficiency, less waste, and lower costs to restore financial viability for cash-strapped consumers and governments.  There is much good growth, new jobs, and new revenue streams that will come from all of this.  But getting from here to there, will be hard on all the countries and economies who are unprepared.  Short-sighted planning has made Canada in particular, a poster child for incoming shock and pain.

Everyone should read the whole important report here, see RethinX: Disruption, implications and choices.  Perfect summer reading.  The quicker we can understand and adapt the better. The more we pretend it isn’t happening, the harder it will be.

This month as Tesla hands over its first 30 all electric Model 3’s (starting at $U 35k), and  all the other car companies race to catch up, the truth is they are all running head long into the massive rationalization of shared, electric transportation that will reduce North American vehicle demand by an estimated 80% within the next 13 years and reduce the market price of old tech vehicles, fossil fuel infrastructure and many of today’s related businesses, towards just scrap value.

There is no more time to waste.  These massively disrupting trends have to inform everything we chose to do from here.