There’s a certain guy on Twitter — I’m not going to give him the publicity of saying his name — who has built a reputation by talking about the very worst of his bankruptcy cases and tweeting about them, further cementing that the average Canadian with too much debt is doomed. DOOMED I TELLS YA.
I’m not a fan of this for a number of reasons.
- Who wants the details of the most embarrassing moment of their financial lives aired for everyone to see, even if there’s no name attached to it? Imagine going to this guy and then seeing a tweet a few hours later that basically says “hey take a look at this dumbass?”
- You can see the underlying glee in all of this in every tweet. It’s like he wants people to go bankrupt.
- He’s a bankruptcy trustee, which means he stands to benefit by more folks declaring bankruptcy or opting for a consumer proposal. No wonder he’s so excited.
- I’ve seen a lot of trash personal balance sheets during my time as a private mortgage lender, and he’ll tweet about six different cases a week that are far worse than the most terrible debt burden I’ve seen in years of doing this.
There’s also a big ol’ case of recency bias here too. If all you saw was the most indebted folks out there, the ones with nowhere else to turn day after day, you’d start to think the rest of the country was screwed as well. I fully admit I have the opposite bias — I’m constantly amazed at how rich Canadians are.
But maybe I’m wrong here. Maybe Canadians are screwed and a wave of bankruptcies are around the corner. Hell, maybe there’s a bunch of bankruptcies happening right now. Why don’t we take a closer look.
Fortunately for us nosy folks (I’m talking about you, Italics Man), the government keeps track of how many bankruptcies there are in the country. And 2018 was not a particularly bad year, even though interest rates crept up a little.
There were a total of 30,313 bankruptcies and consumer proposals in the most recent quarter, up a whole 2.6% versus the same quarter last year. On a rolling year-over-year basis there were a little over 123,000 bankruptcies, which is up just 0.9% versus the year before.
Let’s dig a little deeper into the underlying numbers. Only three provinces had big increases in the number of bankruptcies and consumer proposals. These are, not surprisingly, Alberta, Saskatchewan, and Newfoundland. All three of these provinces have been hit hard by a slowdown in the energy patch, a main driver of their economy.
Numbers in Ontario and B.C. were down on a year-over-year basis despite both Toronto and Vancouver having ridiculous real estate prices.
Putting the bankruptcy “problem” into perspective
Yes, Canadians have too much debt. And I’ll be the first to admit some folks will have problems servicing that debt if rates shoot up another percent or two.
But the bottom line remains: bankruptcy just isn’t that big of a problem in Canada.
There are close to 37 million Canadians. And 123,000 of them filed for bankruptcy in the middle of the biggest debt boom in the history of the world. That’s 0.33% of the population. 99.67% of the population manage to muddle along each year not declaring bankruptcy. And I thing that, like divorce, the repeat filers who manage to screw themselves every decade skew statistics upwards.
A condom is 98% effective at preventing pregnancy when used correctly. That gives it a 2% chance of malfunctioning.
See what I’m trying to get at here? This isn’t a very big problem, no matter what a guy who sees this every day says.
Even Alberta, a province battered by a crummy economy for a few years now, is hardly seeing a massive influx of bankruptcies. It had about 14,000 proposals over the last year for a population of four million. That’s just 0.35% of the population.
Newfoundland, which is widely considered a poor province, has a bankruptcy rate of a little more than 0.40%.
And so on. The stats across the country prove it. Bankruptcy just isn’t a very big problem in Canada right now.
How about historically?
In 2009 bankruptcy and consumer proposal rates hit a peak of about 6 people per 1,000. This gives us a total proposal rate of 0.6%. That’s during the worst financial crisis of the last what, 80 years?
Oh, and the trend has been clear over the last decade. The popularity of consumer proposals is up significantly versus bankruptcy, which has seen a significant downward trend. This means creditors are getting at least a portion of their debt back. This trend should continue even when the economy sputters.
Don’t sweat bankruptcy
Let’s take a minute and talk about bankruptcy and real estate. And let me tell you a little secret from a private lender’s perspective. I’m going to bold this because it’s super important.
People will do anything to keep their house.
This actually bodes well for the underlying real estate market. That wave of overfinanced people selling as they hit a position of negative equity? It just won’t happen. They’ll hunker down and start paying off debt. They’ll search for other innovative solutions. But, for the most part, they won’t throw up their hands and go back to renting.
Look, we all have friends who are terrible with money, right? And yet they don’t go declaring bankruptcy. They muddle along, not really getting ahead but not screwing themselves either. This is the most likely scenario, not a tsunami of bankruptcies.
Your investments and bankruptcies
So what does this all mean with your investment portfolio? Is now the time to sell your bank stocks and run for the hills, AKA the safest part of town?
Normal economic cycles aren’t a big deal. A bad year gives bank stocks the chance to write off some of their garbage loans. The market anticipates this, which means bank stocks will usually bottom months before.
The real risk is in buying the subprime lenders, which in Canada means Home Capital Group (TSX:HCG) and Equitable Group (TSX:EQB). They will struggle if the underlying economy sputters. And they will be more impacted by bankruptcies than regular banks. They also have an additional reputation risk. You’ll start to see deposits leave these two banks if the underlying economy gets too bad.
If you are worried about this, the play to make is shorting Goeasy (TSX:GSY), the purveyor (apparently a word!) of trash loans to dirtbags.
Let’s wrap this up
I’m the first to admit I know very little about macroeconomics, even though I did listen to a series of podcasts about the subject once. Some of the smartest minds in finance can’t get big picture stuff right on a regular basis. So what chance do I have?
But there is one thing I’m sure of, something that constantly influences investing decisions. I believe there’s no way interest rates can ever move back up again in a major way. We’re not going to be paying 8-10% again for mortgages in my lifetime.
A move from 2% to 4% will hurt a lot of people. Then the economy will sputter and central banks will panic. So they cut interest rates and the cycle repeats itself. Canadians are too indebted to support much higher interest rates. That’s the bottom line.