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July 15, 2015 | A Tale of Two Nations

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.

In Washington this morning:

Federal Reserve chair Janet Yellen said prospects are good for further improvements in the labour market and the economy, keeping the central bank on track for an interest rate increase in 2015. “If the economy evolves as we expect, economic conditions would likely make it appropriate at some point this year to raise to raise the federal funds rate target,” Yellen said in testimony prepared for delivery before the House Financial Services Committee in Washington. (Bloomberg)

In Ottawa this morning:

The lower outlook for Canadian growth has increased the downside risks to inflation. While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment. Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target. (Bank of Canada release)

Translation: So much for the dollar. Forget the real estate gasbag. Let’s push families into more epic debt. And kick the can down the road – at least past the date of the next election.

DEBT

Immediately after the Bank of Canada shocked once again with a rate cut the dollar (as predicted) plunged, tumbling more than a cent. Bond prices surged and yields slumped. The Toronto stock market jumped a hundred points. And convoys of leased Audi A7s piloted by giddy, aroused realtors spontaneously appeared in downtown Toronto and Vancouver, honking uncontrollably while leaving a trail of moist Re/Max business cards.

The contrast between America and Canada is arresting. In the States the Fed will raise rates, cut stimulus and contain the inflation that lots more jobs bring. In Canada the strategy to rescue a ship sinking in debt is to have everybody borrow more, dragging demand from the future while blowing up a massive and dangerous asset bubble. It’s hard to see how we can ever have a ‘soft landing’ in 416 or 604 when house prices have risen 45% and 30% respectively over the peak of the last bubble.

The average SFH in Toronto costs $1.1 million, while in Chicago the average listing price is $335,984. In Vancouver a urban detached house now goes for $2.2 million. In Seattle the average list is $627,889. A 30-year mortgage in the US costs 4.3% and a five-year adjustable is 3.1%. Both have been rising this year. In Canada you can now borrow a five-year variable-rate mortgage for 1.98% – even before being nipped for today’s central bank folly.

As this pathetic blog has pointed out (in vain), house prices are negatively correlated to mortgage rates. As rates fall, houses increase and affordability falls. Rising real estate values attract more and more capital, concentrating wealth and turning our society into a one-asset orgy. Meanwhile consumer debt grows twice as fast as the rate of inflation and three times quicker than wage gains.

By the way, look where our dollar sat two hours after being Polozified:

DOLLAR

And why’s this happening? Why did our central bankers just exacerbate the imbalances, ensuring more bad consumer behaviour? Because the economy is sliding, exports are falling, jobs eroding and commodity prices fading. The growth forecast has been slashed to 1%, but it could also be negative. How ironic. Bad news is good news. Before it becomes really bad news.

The big banks will be cautious in adjusting their prime rates and likely won’t pass on all of the cut (TD was first with a trim of just a tenth of a point). Mortgage lenders will be more aggressive. Bankers are smart. They know this is an 11th-hour, pre-election move by a politicized Bank of Canada. The more puffed housing values become over the next six months, the more difficult will be the road back down once the US Fed starts on its long-term path.

Remember that 89% of the time the Bank of Canada has followed the Fed lead. Almost 100% of the time over 25 years, our bond market’s done the same. Rates may falter and weaken now, but they will reverse direction in the future. God only knows what amount of debt the greater fools among us will have wolfed down by that time. Do they understand houses only cost what they do because money’s cheap? That when properties plunge the debt endures?

Nope. Of course not. And how can you blame them? We live in an irresponsible nation.

Bank of Canada overnight rate

RATES

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July 15th, 2015

Posted In: The Greater Fool

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