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July 13, 2015 | The Unthinkable

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

If Canadian interest rates head lower Wednesday morning, history will be rebuffed. It would be one of the most overtly political moves ever for a central bank. The fallout will be intense. And while there’s supposedly an iron curtain between the PMO and the central bank, you can bet Mr. Harper’s guys have been all over this issue like a rash.

Here are four reasons why the Bank of Canada should not chop.

First, as stated, there’s history. Over the last quarter century Canadian and American fiscal and monetary policy has become more indistinguishable and tedious than the Property Brothers. In fact, with free trade in place and de facto economic integration, what else would you expect? So it shouldn’t surprise you to know that 89% of the time our central bank policy has aped theirs, with rates here moving in virtual lockstep with those to the south.

When it comes to the Canadian bond market, it’s even more profound. Over 25 years, bond yields here have moved with American bonds 97% of the time. How do you think the market will react if we go weird now? Because of an election?

This brings us to the dollarette, currently struggling to stay above the 78 mark.  It swooned from a value of 86 cents US on the last day of 2014 to just 78.5 after the Poloz poodles hacked our interest rate a quarter point a few weeks later. Since then the big bank dog called our economy “atrocious”, then likened it to “a heart patient on life support.” In trying to justify the currency-killing and inflation-goosing move of last winter, he’s hardly inspired confidence.

Another move down on Wednesday? That would be looniecide.

Key to all this is reason three. The Fed. On Friday US central bank chair Janet Yellen made it clear, just in case you didn’t hear her the last 14 times that she said it: rates will rise in 2015. So we’re still on track for one or two quarter-point increases, after which the trend higher will be gradual but consistent, adding about 1% a year for the next two. With the Greeks now slapped around and China behaving, the odds of this happening are about 100%.

Yellen will probably reinforce this message when she testifies before Congress at about the same time Poloz is addressing reporters in Ottawa. She will matter. He won’t.

Finally, a rate reduction this week would take the prime to about 2.6%, five-year fixed mortgages to 2.2% and secured lines of credit to 3%. When you consider that Canada’s core inflation rate is 2.1%, it’s obvious we are in uncharted territory. How much closer can it be for people to get free money when they can borrow $800,000 for the same cost as the principal itself is inflating?

This is why we’re steeped in debt, loaded to the gills with loans and pickled in HELOCs. Canadians are snorfling and chomping their way through billions more in mortgages each month, buying houses in record numbers  (at least in 416 and YVR), at record prices. If Mrs. Yellen lives up to her word (she will) and if the historic correlations between US and Canada bond markets hold (count on it), then people borrowing now at 2.5% will be renewing at 5%.

Given that undeniable outcome, how could the Big Dog be so irresponsible as to drop rates now for a few months, encourage more loans, further inflate house prices and murder the dollar?

Simple. He can’t. But might.

***

A week ago the steerage section of this pathetic blog was full of people moaning and pissing about the imminent demise of the financial world. As always, it didn’t happen. We didn’t even get a decent correction out of the Greek-China-volatility funk. In terms of worrying about an actual bear market (a minimum 20% decline), you have a greater chance of finding a scorpion in your shorts.

And while the situation drags on in Greece (politicians have to approve what last week’s referendum denied), the issue’s dead. So are the theatrics in China, squished by a government that just made panic selling against the law. So there.

Here are some year/year returns you might find interesting. The Dow and the S&P are both up 6-7%. In Europe the German market has gained 18%. London is ahead 3%. In China the Shanghai market (despite the recent temporary plop) has returned 94%. Among the losers are Athens (down 34%) and Toronto (off 3.8%). So, feel sorry for most Canadian investors, since their home country bias means 70% of them have every dollar in domestic assets.

The more you have a balanced, globally-diversified portfolio, the more you mitigate risk and plot a predictable path forward.

Or, you can run around screaming and dripping. Tough choice.

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July 13th, 2015

Posted In: The Greater Fool

2 Comments

  • Avatar SirTalksAlot says:

    CDN dollar should be around 76 cents. Should have gone all in USD when we had the chance, we can’t even tread water against the imploding Euro. Too bad we don’t qualify for the Green card lottery… My bet is that we WILL drop rates Wednesday and the Americans WON’T raise this year, that is unless the fed is refunding interest payments back to the treasury.

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