I don’t have any strong political views, I genuinely believe politicians are just pawns in a bigger system that is deeply entrenched in society today. In other words, full of promises but not a whole lot changes regardless of who gets in power. I do, however, have a few observations about these elections that i’d like to share. First of all, the election this September shouldn’t even be happening. The Trudeau government clearly misread the sentiment emanating across society. Inflation is at a 10 year high, housing affordability is at a 30 year low. We’re just pulling ourselves out of a recession with a million Canadians still out of a job. People are tired and frustrated from a pandemic with seemingly no end in sight. Drug and alcohol usage is through the roof. It’s quite likely that the mental health crisis that’s been created will be an even bigger problem than Covid. Suffice to say people are pissed off and looking for change of any sorts. It’s quite possible that not only will Trudeau fail to gain a majority, but he could lose to the Conservatives. At least that’s what the polls are saying. Again, don’t shoot the messenger. Anyways, this has

Election campaigns are in full swing, and at the centre of the political debate is the cost of living. CPI inflation just ticked in at 3.7% in July, one of the highest readings over the past two decades. Furthermore, housing inflation is out control, with national home prices accelerating at their fastest pace on record, officially up 22% year-over-year in July. According to RBC, housing affordability, or the lack thereof, is the worst it’s been in 31 years. While central bankers are convinced this problem is merely “transitory”, there’s no question monetary policy is being rightfully scrutinized. It’s been over a decade with a near zero interest rate policy that has crushed savers and forced capital into alternative assets such as housing. The resulting house price inflation is no coincidence. In fact, just take a look at the growth in mortgage credit, which is now running at its fastest pace since 2007. It’s a cheap debt housing bonanza. I mention this because it is rather perplexing that the prime minister of Canada, who is ultimately responsible for setting the Bank of Canada’s mandate every 5 years, and which is also up for renewal this year, was quoted this past week

Here we go, the highly anticipated federal election this fall is now confirmed. The Trudeau government will seek to win a majority government in what is undoubtedly a power grab at a pivotal time in history. “Canadians need to choose how to finish the fight against COVID-19 and build back better. From getting the job done on vaccines to having people’s backs all the way to and through the end of this crisis”, noted Trudeau in a press conference Sunday. Regardless of your political leaning, there’s no question this will be a critical election as the economy recovers from the pandemic. One thing is clear, we are entering a new era, one marked by increasing government control. Economic growth is going to rely heavily on fiscal spending and central bank debt purchases moving forward. Debt levels are simply too high, and in order to squeeze more growth from an over indebted society, government will need to keep their foot on the fiscal accelerator, and the central bank will have to play along, mopping up debt issuance to keep borrowing costs in check. You might not like the sounds of that, but it is what it is. No government in this election

The great reopening trade is in full swing. People have exited their homes and real estate has become less of a priority. We can see this in the housing data which continues to recede each month since the FOMO induced top in March. Sales here in Greater Vancouver have now dropped for four consecutive months in a row, but are still running above normal levels. Meanwhile, new listings have evaporated, with sellers seemingly delaying their listings until the fall. I know what you’re thinking, “this always happens in the summer, real estate is seasonal.” While that is certainly true, this summer slowdown has certainly been more dramatic. For example, this July was the weakest July in 11 years for new listings. For detached homes it was a 20 year low in new listings. This is downright painful for home buyers who have been plagued with inventory shortages over the past year. In other words, the cupboards have been looted bare and they aren’t being restocked, at least not yet. To no surprise, the same phenomenon is playing out in Toronto. New listings in the Toronto area plunged 32% from last years levels, and overall active inventory for sale is now

he Canadian government announced it has extended its pandemic recovery benefits (also known as helicopter money) until October 23, 2021. It’s getting hard to track all these programs, not to mention how many times they have now been extended. The following money drops are ongoing: 1. The Canada Recovery Benefit (CRB) 2. The Canada Emergency Wage Subsidy (CEWS). 3. The Canada Emergency Rent Subsidy (CERS) 4. The Canada Recovery Caregiving Benefit (CRCB) 5. The Canada Recovery Sickness Benefit (CRSB) “Extending these supports — which have been lifelines for many — is needed,” Finance Minister Chrystia Freeland said in the release. “This is of particular importance for those workers and businesses that have been hit hardest by the pandemic and are still reopening and rebuilding.” Politics aside, these programs have certainly been useful in avoiding an economic calamity, however, when and how to exit these programs remains a big question mark. Many businesses are already reporting difficulties getting people back to work, and with the money supply growing close to 20% year-over-year there are increasing fears of inflation. Ironically, in the same week these measures were extended, the CPI inflation printed north of 3%, and the Bank of Canada’s Tiff Macklem decided to write an

According to a report this past week from the National Bureau of Economic Research, the pandemic recession only lasted two months, from February 2020 to April 2020. This makes it the shortest recession in the history of the United States. The Bureau defines a recession usually as “a decline in economic activity that lasts more than a few months.” It was the sharpest and shortest recession in living memory. Pretty incredible stuff, considering there were some pundits calling for a second coming of the great depression. The policy response from governments and central bankers was unbelievable. Helicopter money, mortgage payment deferrals, wage subsidies, you name it. The biggest takeaway, however, is the extent policy makers were willing to go to maintain the exiting financial system, and creating a playbook for the next crisis. Why is this important? Because, as Raoul Pal of Global Macro Investors alluded to recently, global debts of all forms total between $400 trillion net and $1.2 quadrillion gross (yes, Quadrillion), therefor the collateral (assets) can NOT be allowed to fall or the system is wiped out. So we now have a game of whack-a-mole. Every time asset prices start to decline central banks must intervene with more

I’ve talked a lot about the great reopening trade. People are getting vaccinated, the weather is great, and people are desperate to get out of their house after tiresome lockdowns. In fact, Canada has now fully vaccinated 48.8% of its population against Covid-19, overtaking the U.S. for the first time. It’s no surprise that housing has finally come off the boil. Official housing data released last week from the Canadian Real Estate Association shows seasonally adjusted home sales are off 25% from their peak in March. Sales declined month-over-month in nearly 80% of all local markets. Yes, the pandemic induced FOMO has finally been sucked out of the housing market. Similar to the run on toilet paper at the onset of the pandemic, the run on housing created an acute shortage of supply, driving prices much higher. The MLS home price index, which adjusts for sales composition now suggests the typical home has risen 24.4% from last year- a record pace of home price inflation. Here’s how it looks across major metros: Toronto 19.9% Montreal 27% Vancouver 15% Calgary 12% Edmonton 8% Ottawa 28% Unlike the toilet paper crisis, the housing crisis will take longer to sort itself out. Total active

Per the most recent data from the Canadian Bankers Association, nearly 17% of all mortgages in Canada received a mortgage deferral at one point or another during the pandemic. At the end of February, 98% of those deferrals expired. Home prices during this time are up 24% nationally. Who saw that coming? Certainly not our own government mortgage and housing agency, the CMHC. Remember the call was for a drop of 9-18% across the board. There were a lot of money riding on that call, ouch. In all fairness to Evan Siddall, then head of the CMHC, it was a reasonable view at the time considering job loss was pervasive, the worst any of us had seen in our lifetimes. This prompted the CMHC to tighten underwriting criteria at the time over fears of buyers entering the housing market and going belly up. Of course the private insurers, Canada Guaranty and Sagen, never followed suit and gladly absorbed the additional business. CMHC’s market share was between 45 -50% pre pandemic but slipped to 23% by earlier this year. In contrast, Sagen’s market share climbed to 44% and Canada Guaranty’s to 33%, according to RBC Bank. What appeared to be a prudent

The pandemic induced housing boom has been well documented so I won’t go into great detail here. In hindsight it was easy to see, people got locked in their homes, they suddenly needed more space, some people decided to move further away from the office as the prospects of work from home appeared more permanent. Armed with ample liquidity provided by central banks, the government, and the commercial banks, home sales soared to record highs and prices have followed suit. Global property prices have surged. Here in North America, Canadian home prices are up 24% year-over-year, US home prices, as measured by the Case-Shiller index are now up 15%, that’s good for the largest annual gain since the 1980s. Madness. However, now the true test comes. Similar to the stock market, you have the pandemic trade, and now the reopening trade. Most of the US is now fully open, people are emerging from their homes and eager to travel. House shopping is fading. US home Sales of existing homes in May dropped for the fourth straight month. “Sales are essentially returning towards pre-pandemic activity,” Realtors chief economist Lawrence Yun said. Mortgage applications continue to fall, now at their lowest levels since January

There’s a lot of bets these days on higher inflation and higher interest rates. After being plagued for over a decade with a zero interest rate policy, a new combination of government spending and central bank QE purchases are poised to send inflation higher. So far that’s been the winning trade, with CPI inflation printing close to 4%. However, it seems not everyone is convinced we have an inflation problem. The European Central Bank, one of the most important central banks, doubled down on their views this past week. “Inflation has picked up over recent months in the euro area, largely owing to temporary factors, including strong increases in energy prices. Headline inflation is likely to increase further towards the autumn, continuing to reflect temporary factors,” noted president of the ECB, Christine Lagarde. More importantly, Lagarde added, “Negative interest rates have often been criticized because of their potential side effects. Our assessment continues to be positive as the benefits continue to outweigh the costs.” This begs a couple questions. If inflation is truly transitory are we looking at another decade of zero interest rate policy? What does that mean for risk assets? More importantly how do we define transitory? According

Canadian house prices have been flagged as over valued, unstable, and a risk to the financial system for a long time. These concerns have been noted by institutions such as the IMF (International Monetary Fund) since at least 2012, and have been cited as a major concern by our very own central bank since about 2005. However, betting against the housing market in Canada has proven to be a widow-maker trade. Maximum pain. The housing markets resiliency here has ultimately reinforced confirmation bias that prices never go down. A 20 year bull market that keeps on giving. This view that you can’t lose on housing was recently re-affirmed when house prices failed to drop during a period of record job loss at the onset of the pandemic. Yes the market was ultimately bailed out through government intervention, but that is irrelevant. People believe the government will always be there to support housing because, why wouldn’t they? They’ve already showed their hand- housing is too big to fail. We can see this belief in the form of market activity. House prices nationally ticked up again in May, now up 24% on a year-over-year basis, the fastest pace of home price acceleration

The Covid housing boom has spurred new riches for Canadian homeowners. Household net worth surged 21.5% year-over-year in the first quarter, the largest gain on record. Indeed rising home prices, at least on paper, are making Canadians feel wealthier. To no surprise, households that own their home accounted for almost all of the gains in the first quarter – $730 billion. The wealth of renters was up just $43 billion. Of course none of this would be possible without some help from policy makers and the big banks ramping up mortgage lending. Printing mortgages is a profitable business, and the big banks are now sitting on $40.5 billion in excess common equity tier 1 (CET1) capital. The Big Six internally target an 11% CET1 ratio, but lenders have barrelled past that marker, booking an average 12.8% ratio with a combined total of $270.6 billion in CET1 capital — the highest on record. This excess capital has to be deployed, and the bulk of it is expected to be returned to shareholders. If you’re noticing a common theme here, yes, the booming housing market has been great for existing asset holders. However, for those less fortunate who don’t own assets, they are falling further