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September 6, 2015 | Wallowing

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.

Kate Whyte, a 48-year-old princess and media hound from North Van made news last week claiming to be homeless, even though she has $1 million in cash. This happened about the time that little boy washed up dead on a beach and thousands of Syrian refugees, also homeless, were being waterbombed and beaten by countries that don’t want them. Kate made a fake ‘Homeless’ sign on a piece of cardboard so she could be photographed holding it. The gimmick worked. She was famous for a day or two.

No, this post is not about our egocentric, sad society losing its way, although there’s a strong case. Instead, let’s focus on what comes next.

By the way, Kate the princess and her husband sold their Van home (on which they made a huge, taxless capital gain) for $1.3 million, wanting to downsize. Then she found it was hard to buy in again for two hundred less, since the local market is suffering from too few listings and too many fools. Renting is beneath her, but being a media pimp apparently is not. Anyway, here she is:

KAREN modified

Now, the world is changing which suggests this may be peak house. Seeing what Kate  did (she’s not alone), the attention she received plus events like an uninhabitable east-end Toronto house selling for a million a few days ago, should make anyone wary about jumping into the real estate circus at this time. But you should also keep an eye on the single greatest factor which created bubble conditions in 604 and 416. That, of course, is cheap money.

Looks like we’ve hit the bottom in Canada, but will know for sure Wednesday morning. That’s when the central bank makes a key announcement which affects the chartered banks’ prime rate, lines of credits, HELOCs and variable-rate mortgages. Lots of people on this blog and elsewhere have argued the Bank of Canada will cut that rate for the third time in 2015, because the economy now blows. The collapse in commodity prices back to 1999 levels, taking oil with it, is having a dramatic effect.

For example, here’s what Bloomberg had to say this weekend about our vaunted oil sands industry:

The last place oil producers want to be when prices plummet to profit-demolishing lows is midstream on a billion-dollar project in one of the costliest parts of the planet to extract crude. Yet that’s exactly where half a dozen oil sands operators from Suncor Energy Inc. to Brion Energy Corp. find themselves with prices for Canadian oil now hovering around $30 a barrel. While all around them projects have been postponed or canceled, their investments were judged too far along when the oil game suddenly moved from offense to defense. These projects will add at least another 500,000 barrels a day — roughly a 25 percent increase from Alberta — to an oversupplied North American market by 2017.

So, if there ever was a time to pull out the stops and try to mitigate the coming damage, you’d think it would be now. Until you realize that might make things worse. This is exactly where the Bank of Canada sits. And why, the experts agree, rates are not doing down.

“We expect the Bank of Canada to remain on hold on Wednesday with the overnight rate unchanged at 0.5%,” says Scotiabank Economics. “85% of the Canadian economy is not accounted for by the direct and indirect effects of the energy sector despite the (wrong) global impression that Canada just produces a whole lot of tarry black stuff.

“The media and some politicians call this a recession, but it doesn’t fundamentally pass the smell test for such a call. In fact, if the pace of job growth so far this year holds up over the remaining four months then 2015 will post the fastest pace of job growth over the past three years and come in at about 170,000 jobs having been created. This. Is. Not. A. Recession. The risk is that the more we keep wrongly hearing the country is in recession, the more people might actually start to believe the nonsense and make it a self-fulfilling prophecy.”

Well. Strong words from a bank.

Even economic bear economist David Madani has changed his tune. “August’s employment gain of 12,000 was better than most had expected, thanks mainly to a hiring spree in the public sector. This is more evidence supporting our view that the economy likely returned to positive growth in the third quarter,” he says.

Plus look at his comments on the recent trade numbers: “The narrowing of the trade deficit in July indicates that the economy began the third quarter on a solid footing. This supports our view that, after suffering a mild recession in the first half of the year, the economy has returned to positive growth. Indeed, the risks to our forecast that third-quarter GDP growth will be 1.5% annualised now lie to the upside.” Madani also says no rate hike on Wednesday.

So these guys conclude the following: the energy sector’s in deep crap, but the rest of the economy is not. In fact, things are getting measurably better. If the central bank were to drop rates again it’d be a mistake. The dollar would wilt and household borrowing would plump, without an offsetting positive. Besides, money is too cheap now. That’s gotta change.

This is the conclusion the Fed has also reached. The era of monetary stimulus – using government money to buy bonds or subsidize consumers while pushing lending rates into the ditch – must end. If not, we’re sowing the seeds of a destructive round of inflation while bloating dangerous asset bubbles

So, our central bank will not move this week. The Fed will increase this autumn. Bond yields and fixed-rate mortgages will rise as a result. The cheapest rates ever will be gone. House prices will begin to reset. And Kate will really, really regret that picture.

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September 6th, 2015

Posted In: The Greater Fool

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