Making sense of the markets this week: April 5, 2021

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

Serious concerns over the Canadian housing bubble

BMO has sounded the alarm with strong warnings about what many are calling a housing bubble in Canada. In fact, it’s on fire. From a Yahoo! Finance post…

“One of Canada’s biggest banks is calling on policymakers to act immediately as a ‘fire department’ for blazing housing markets.

“Bank of Montreal (BMO) senior economists laid out a series of recommendations in a new report titled Canadian Housing Fire needs a response and rated how effective a number of those measures would be.”

Some areas across the country are experiencing year-over-year price gains in the area of 30% to 35%. There is a low inventory and a shift in demand thanks to the pandemic. Low borrowing costs are adding fuel to the fire. 

BMO said the most acute problem is market psychology, even as supply-side issues persist. “The action needed today is one that immediately breaks market psychology and the belief that prices will only rise further. That would dampen the speculation and fear-of-missing-out that those expectations are creating,” BMO’s senior economist Robert Kavcic and economic forecaster Benjamin Reitzes noted. 

And on the subject of Canada’s real estate bubble, this Yahoo! Finance video is a must-watch. Industry experts John Pasalis, housing analyst and President at Realosophy Realty, and Steve Saretsky, housing analyst and realtor at Oakwyn Realty, say investor psychology is driving the frenzy. It’s FOMO—the fear of missing out. “They need to buy a house now or they’re never going to be able to afford one,” offered Bains, who studies investor psychology as it pertains to real estate.

Both experts say there is certainly a housing bubble of epic proportions. And home buyers are being cheered on by our Central Bank and politicians, with the promise that low rates and borrowing costs are here to stay until 2023. 

In their report, BMO offered.… 

“Interest rates and the Bank of Canada’s commitment to keep them low for years are arguably the key drivers behind the meteoric surge in home sales and prices across large swathes of the country. A move here would have an immediate, clear and notable impact to cool housing.”

National Bank says: higher rates, no problem

National Bank’s opinion is that households are prepared to navigate higher rates. The study says we’re in good shape, there are many positive events and forces. 

On advisor.ca.… 

“‘The success of the economic recovery will depend on Canadian consumers in the coming months. There are several reasons to be optimistic,’ the [National Bank] report said. To start, households enjoyed a record increase in both disposable income and the savings rate in 2020.

“‘Excess savings—which we currently peg at 8% of GDP—are currently hibernating in deposit accounts and are ready to be tapped by households once free of COVID-related restrictions,’ the report said.

“‘At the same time, household finances have also been given a boost by rising real estate prices and strong financial asset returns—producing the “strongest positive wealth effect since 2009,’ the report noted.”

However, on the subject of borrowing and interest rates, we might want to take that opinion with a grain of salt. Rising rates might quickly or eventually become a concern for many recent first-time buyers who’ve taken out massive mortgages. That is the elephant in the real estate room. 

Here’s a tweet that highlights the recent real estate activity in Canada:

Selected Canadian Real Estate and Housing Starts for February #canada #realestateagent #cdnpoli #novascotia #ontario #mls #viewpoint pic.twitter.com/GwRLUeXfQm

— Burnsco (@garquake) April 1, 2021

Canadian regulators are taking a close look at crypto platforms

In last week’s column, we discussed the incredible adoption of bitcoin ETFs and closed-end funds by Canadians. The new bitcoin ETFs attracted 17% off all purchases in February 2021, and that popularity has contributed to an ETF fee price war. 

This week we learned that Canadian regulators are getting their collective heads around the cryptocurrency trend. Regulators announced new guidance for cryptocurrency traders in Canada. From Advisor.ca: “IIROC, CSA serve notice to crypto-trading platforms.” 

When I first read that headline, I suspected ETFs and closed-end funds would be impacted, but that is not the case. It is status quo on the regulatory front for Canadian bitcoin ETFs and closed end funds. (Here is my explainer post on the ins and outs of bitcoin.) 

With an ETF or closed-end fund, the fund company or ETF provider will manage the bitcoin or ethereum assets on your behalf; the assets will be held and stored by a third-party custodian. In Canada, all of the funds use the U.S. firm Gemini as the sub-custodian. (More on Gemini and their regulatory requirements later in this post.)

This tweet from Mags on the approved funds in Canada shows the custodian arrangements. Gemini holds the keys to the bitcoin. 

https://twitter.com/Crypto_Mags/status/1369813709535649793

The new regulatory efforts will only impact exchanges or platforms, both domestic and foreign, directly facing Canadian investors who are trading digital assets. In an effort to bring these platforms into the regulatory regime, they will have to register as the first order of business. For example, in Ontario, the deadline to get in touch with regulatory authorities is April 19, 2021. Currently most of the platforms are registered with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), a government agency responsible for tracking and policing money laundering and terrorist financing. 

It will be a two-year process where the crypto asset platforms are registered as restricted dealers, with eventual registration with IIROC that oversees all investment dealers and trading activity in Canada. The interim approach is intended to allow firms to continue operating while starting to bring their businesses in line with the new guidance. 

And for those that register, it may not be business as usual; there will likely be some new guard rails. For example, Wealthsimple Digital Assets, currently the only CTP registered as a restricted dealer, permits clients to invest a maximum of $30,000 (Cdn) in crypto in a 12-month period. 

Will U.S. firms even bother?

There is a concern that the major US platforms that many Canadians use will not bother to jump through the regulatory hoops. And currently there is no Canadian bitcoin custodian available. 

The requirements even for the initial registration are considerable. And as Lori Stein, a partner and regulatory expert with law firm Osler, Hoskin & Harcourt LLP, offered in a phone conversation, for the U.S. exchanges, Canadian compliance processes and standards is a foreign concept. To qualify for registration, foreign exchanges would need to have staff in place with certain registrations and qualifications (including a chief compliance officer), and they would also likely have to hire legal expertise that can navigate the Canadian regulatory waters. It will be costly and time-consuming.

It is quite possible that many or all of the U.S. platforms will take a pass on Canada. In the grand scheme of all things crypto, Canada is a very small market. 

What is the possible outcome? This from Brian Mosoff, chief executive officer of Toronto-based Ether Capital Corporation… 

“It’s unclear at this time which platforms intend to engage with the regulators and move towards appropriate registrations. It is highly likely that any platform that does so will not be able to offer the variety of assets that investors are accustomed to trading, at least for the foreseeable future.” 

Mosoff adds that it may add up to pay more and get less: 

“Canadian crypto investors may potentially be forced onto platforms they don’t have a desire to use and that are higher-cost than existing U.S. or international platforms. They could end up with inferior offerings, with more limited products and greater costs.”

Crypto funds can continue to use Gemini 

In what is an odd twist, even if Gemini does take a pass on registering as a dealer in Canada (to offer assets directly to Canadian investors), they can still continue on as a sub-custodian. 

Gemini is providing services to the Canadian funds as a sub-custodian, with Cidel as the Canadian custodian. This is allowed for public investment funds even when holding assets outside of Canada. This would continue to be permissible even if Gemini decides not to register as a dealer in Canada.

It’s never boring in crypto land. Even the regulation and lawyer “stuff” is filled with drama, twists, turns and surprises. 

It is the regulatory environment that will steer the direction of crypto in Canada. 

Suez Canal blockage leads to inflation worries…and entertaining memes

One of the big stories (and source of many jokes) of the last couple of weeks was the blockage of the Suez Canal. The container ship Ever Given ran into a sand storm and was beached. It blocked all traffic moving through the Suez Canal. 

All of a sudden Twitter and Google denizens became experts in shipping and international trade routes. Incredibly, 12% of all global trade moves through the artificially-constructed Suez Canal. It was enlarged from its natural state to allow for shipping. Ditto for the Panama Canal of course. 

We learned that the ships used to move products around the world can be massive—the Ever Given dwarfs the Eiffel Tower. 

https://twitter.com/_Leaf_of_Life/status/1377230768913715202

International supply chains were already challenged due to the pandemic. Many goods and parts are in short supply, and that supply-and-demand imbalance can lead to higher costs. Ever Given added another layer to the inflation watch. Ever Given blocked $400 million per hour in trade, every hour for the 10 days it was lodged. 

From that CNBC post.… 

“The delays have been costly.… Nike along with retailers Crocs, Gap, Peloton, Footlocker, Five Below, Williams Sonoma, Steve Madden, Whirlpool, Urban Outfitters, and Tesla all cited supply chain problems impacting their business this quarter.

“Brian Bourke, Chief Growth Officer of SEKO Logistics tells CNBC, the blockage is creating the perfect storm for retailers who are struggling to restock.”

$300 a day to rent a subcompact car?

And here’s an additional sign of supply and demand and costs to come, perhaps. Did you know it costs $300 a day to rent a Kia Rio? From that post… 

“‘We’re looking at rates of $500 a day in some places,… Last spring we were seeing $5-a-day rentals in Hawaii. You’d never seen that. Now you’d kill for a car for $300 a day’.” 

Pockets of inflation might be waiting on the other side of the pandemic. Are these prices coming to Canada this Summer? 

Don’t be surprised if you run into some inflation sticker shock. 

Debt and deficit spending: 50 years in the making

I just had to share this source and post with MoneySense readers. John Mauldin is a must-read, IMHO. Here is his post “The 1970s never ended.” 

Mauldin suggests the economic storm and events set in motion some 50 years ago are still in motion today. It starts with President Richard Nixon taking the U.S. dollar off of the gold standard. The dollar was pegged to, or backed by, physical gold. You could not just print paper money on a whim (or press a button and create hundreds of billions of dollars, as happens today). 

From that post, and on when the trouble started:

“The U.S. would hold most of the world’s gold, guaranteeing other nations could convert their gold reserves at a fixed $35 per ounce rate. Essentially, this tied other countries to the U.S. dollar.

“Bretton Woods ‘worked’ for almost 20 years but with side effects, not unlike today’s euro problems.… Starting in the mid-1960s, various European countries began demanding payment for their dollars in gold. They wanted the U.S. to balance its budget, which had gone wildly into deficit because of the Vietnam War.”

These days we are in the midst of a different kind of war (with COVID) and, of course, we have the deficit spending and alarming debt levels to go along for the ride. 

The first modern day pandemic and war required a historic response by governments and central banks. 

That Mauldin Economics post will help shape your perspective on gold, debt, and fiat currency. Given that, we might appreciate the use of gold or bitcoin (what I like to call “new gold”) in a portfolio. 

The unfortunate trend of the separation between haves and have-nots is also on display in that post. These are clear, consistent and ongoing trends that are perhaps even being accelerated. 

Machines and modernization of the workforce have been the wedge between the rich and the working classes. Look to the post for some shocking charts. 

“One reason for that is the productivity we talked about earlier. It really shows up as the capital equipment and technology which is bought to reduce the cost of labour (robots, bank ATMs, computers, automated production lines and many others). It all reduces the share of income going to labour while raising income for machine-owning capitalists.”

The ability (or not) to invest in stock markets exacerbates the wealth disparity. We own the companies that own and develop the machines and technologies. 

Investing is a hedge against the future. 

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge. 

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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