This week, Tik Tok Teens troll the President, Trading Bros flood the stock market, and we take a look at inflation and why it is coming to a town near you.
Weekly Pulse
GEN Z Americans requested millions of tickets to President Donald Trump’s first campaign rally. In response to this demand, President Trump’s campaign installed large outdoor giant screens and boasted of an expected record showing [read article]. The event itself was quite a controversy given its location in Tulsa (site of the Tulsa massacre in 1921), its timing (one day after Juneteenth especially given it is in Tulsa) and the global pandemic (massive health crisis bringing people together). Gen Z Americans never intended on going and the result was a half empty stadium and a crowd of maybe 10,000 watching the President at his first rally [read article] .
NDP Leader Jagmeet Singh was kicked out of congress for calling Bloc Quebecois leader Alain Therrien a racist for refusing to support an NDP motion dealing with systemic racism: [read article]. "Yes. I've said it really clearly. I repeat it really clearly," Singh said. "Anyone who votes against a motion that recognizes the systemic racism in the RCMP and that calls for basic fixes for the problem … is a racist, yes."
Barstool Sports founder David Portnoy, who goes by the nickname "Davey Day Trader," is a key leader in a new following of day traders dubbed: Retail Bros (amazing). Trading in this manner is focused on short term gains, faster buying and selling, and higher risk. A large enough day trading group can actually push stock values up all on their own. The case of Hertz – a bankrupt company who had seen its stock price jump 1200% after bankruptcy, and FANGDD, a Chinese online real-estate group which has a similar name to FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) jumping 2000% are two reported cases [read article]). One of the more amazing reports I have read cited the lack of sports and gambling on the high-risk trading is what is pushing this new stock buying movement. Thus far, the bros are winning as markets continue to move up. Pumping stocks is not new and the power of the crowd cannot be under rated. That being said, in evaluating strategies, don’t forget that rising tides lift all ships… be aware of what you are getting into.
Oaktree Capital Co-Chairman Howard Marks, one of the great investors of our time, released his quarterly memo: [read article]. I highly recommend reading this (good contrast to the bros). He, along with many other “legendary” investors proclaimed in mid-may that the market was too expensive and yet here we are a month later and the S&P 500 index is up another 13% - only down 4% from where it was at its all time high BEFORE COVID-19 hit. Two standout excerpts:
“That’s one of the crazy things: in the real world, things generally fluctuate between ‘pretty good’ and ‘not so hot’. But in the world of investing, perception often swings from ‘flawless’ to ‘hopeless’.”
“A lot of smart, experienced investors concluded that asset prices had become too high [in May] for the fundamentals. Time will tell.”
Beware the retail bros. Invest in tranches.
Why should you care about inflation?
We have written two previous pieces on why now is the right time to buy a house. The first covered the opportunity in pricing due to the recession and fear from COVID [read article]. Since then some markets, especially in areas of the GTA and Vancouver, have bounced back very quickly - though the average selling price has been, on average, only 1% over listing (ie. bidding wars are not frequent so don’t be scared away). The second article highlighted what we can afford [read article]. The reason we wrote that article is to show that with current interest rates there are affordable options for many of us – but that we need to be realistic about which price point we approach (to ensure quality of life and financial health).
Today we write the final piece regarding why now – and by now, I mean during this COVID pandemic – is the right time to buy a home. The answer, in one word, is inflation. Inflation will cause the price of housing to skyrocket to unaffordable levels within 5-10 years. In the face of inflation, property is the best investment you can make.
Inflation is the rate of the rising prices of common items that we need to live. Food, gas, water, transportation, medical care and our homes. It is measured using an index called the Consumer Price Index which weighs the significance of each item in our every day lives and then spits out a single number – much like the S&P 500 stock index. If the CPI number goes up, then prices are going up, and we are experiencing inflation. If it goes down, then we are in a period of deflation.
Inflation is a good thing. Policy makers target inflation to promote growth in profits, sales, and wages. Inflation at a reasonable level means a comfortable growth in spending and a confidence in long-term purchases and investments due to a knowledge that they will go up. The problem, like with anything in life, is when there is too much of a good thing in the form of excess inflation (or deflation – but that’s for another time).
In periods of high inflation it is a good investment decision, if possible, to own real estate
Periods of high inflation see some very dramatic and often binary outcomes. If we see the prices rise for our goods, then companies start to make more money – but their costs also go up which means our wages go up. With more money to spend tangible assets that are in short supply - like real estate, or gold – increase dramatically in value. For some, this is great. The wages they earn keeps pace with the increase in costs. But for many, it doesn’t – especially if you do not own tangible assets. In periods of high inflation, it is a good investment decision, if possible, to own assets like this as they often increase beyond the pace of inflation (and far beyond our wage increases).
To give an example of a time of excess inflation, let’s look back at the 70’s. The late 60’s and 70’s were a period of high unemployment after a war (Vietnam), an oil crisis, civil unrest and an impeached President (doesn’t this all sound too familiar). In the face of economic uncertainty (for many reasons), governments looked to stimulate job growth and the economy with a form of financial stimulus (again, similar to today).
If we use that same growth rate from the 1970s, the average price for a home in the GTA would increase from $900,000 today to $2,600,000 in 10 years.
To understand the effect of inflation in the 70’s on real estate, let’s take a look at the GTA. That core basket of goods that we just talked about in Toronto, which, lets say, cost $100 in 1971, cost $243.19 in 1981. In other words, $100 in 1971 was worth $41 by 1981. Let that sink in for a second… In 10 years, all of our money was worth half of what is before - without us doing anything. At the same time, the average cost of a home in the GTA increased from $31,000 in 1971 to $90,000 in 1981. An increase of almost 200% [read article]. If we use that same growth rate, the average price for a home in the GTA would increase from $900,000 to $2.6 million over the next 10 years.
I am not an economist and even if I was, these are all predictions and are currently up for debate. That being said, I think Isaac Newton said it best:
“For every action in nature there is an equal and opposite reaction” – Newton’s Third Law
For every action there is both an equal and opposite reaction. The world has injected more money into the economy than at any time since World War 2 (Canada is included and has committed around $100 billion). Interest rates – and therefore the cost of borrowing – is making it as easy to borrow money as it has ever been in history. These actions will cause an equal type of reaction. Money will flow through our economy and prices will move accordingly. While we can debate the comparison to the 70’s, there is a feeling of déjà vu – and as we all know, history repeats itself.
But what happens if we don’t experience inflation? Over the last 30 years Canada has experienced very steady inflation growth of just under 2% a year. To put that into context, in 2010, if you had $100, that $100 would be worth just over $84 in 2020. This is basically the same as it was between 1990 and 2000 and 2000 and 2010. Let’s look at the graph of real estate in the GTA during this time period:
The only time we saw a dramatic drop was when we implemented foreign buyer restrictions in 2017 (leading to the largest price collapse in 30 years in Toronto and Vancouver). If general conversations with friends mean anything, we are all in awe of how expensive real estate is today. We talk about 67% growth between 2010 and 2016. This is nothing when compared to a period of high inflation! But it sure sets a nice safety net for knowing our purchase is a safe investment.
There is a global health crisis and a low Canadian dollar meaning that when immigration starts again, foreign companies will want to spend here and people will want to move here.
Further to this, we have even more reasons to be confident in Canadian real estate. We have recently seen Toronto, Vancouver, and Montreal establish themselves on many lists as top 20 cities in the world in which to live. Toronto has established itself as a global headquarters as hosting the 7th most Fortune 500 corporate offices in the world. Just as interesting is that during the last few years there has been a stagnant or declining population growth in each of America’s major cities (New York, Chicago, LA) – this is the opposite in each of Canada’s cities [read article]. On top of that all, there is currently a global health crisis and likely a low Canadian dollar for the next while meaning that when immigration starts again, foreign companies will want to spend here (as it will be cheaper) and people will want to move here (because hooray for health care). This will continue to drive up prices.
So what do we do about this? We push and shove and make sure that if we have cash or investments, one of them is property. Non-desirable places to live will become desirable in 10 years. Take a look at NYC prices after the crash in 2010.
If you are looking to invest, make sure property is on your to do list and get it done before this pandemic ends
As an investment, it was a much better idea to be in Brooklyn or Queens than it was Manhattan (and now imagine this increase in a period of inflation). Find your Brooklyn. If you need to be in the city, think of renting and still buying in up and coming areas around the cities. The opinion of this writer is very clear: if you are looking to invest, make sure property is on your to do list and get it done before this pandemic ends. Be honest with where you can live. Happy hunting.
This community will build because of your questions. Tell us what you’re interested in most. Are you looking to invest? Wondering the risk of your industry or company? Want to learn about the property market? Leave us a comment or send us a note and we will answer that question for you.
Disclaimer: The New Norm is written to provide actionable advice and stimulate financial questions in an effort to increase the financial health of the community. Your decisions are yours alone and we do not take responsibility for your actions. Please think long and hard before making financial transactions and know that past results are not indicative of future returns. There is always a risk when you are investing.