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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

November 6, 2015 | Au Revoir

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.

 

Even Sherry Cooper couldn’t polish it.

“The jobs numbers released today for October exceeded expectations in both the U.S. and Canada,” the former bank economist, now shill for Dominion Lending Centres wrote Friday morning. “This was a particularly important report for the U.S., because it all but insures that the Federal Reserve will hike rates for the first time in a decade when they next meet on December 16.”

In fact, November 6th may go down as the day the music died – at least for those delusional Canadians (millions of them) who think rates will always stay low and houses high. By the afternoon, mortgage brokers were getting the latest news. Get ready. Rates are going up.

Got an email from the mortgage broker with which i have a lock until January. Lenders are pulling rates up and they have until 4PM today to roll over their current commitments. Dominion Lending Centres. The mortgage hub. – Blog comment

In case you missed it, here’s the news you should know.

First, the US created 271,000 new jobs last month, blowing the doors off estimates and reaffirming the country is in the heat of a sustained recovery. That news was enough to convince Sherry and everybody else (except a few mouldy doomers who lurk on this site) that the Fed will initiate rate lift-off in six weeks.

Second, in the bond market prices dropped and yields spiked. As suggested here (with nauseating frequency), the certainly of higher rates had already pushed yields up, making it all but certain fixed-rate mortgages will also rise.

In fact, look what happened to Canadians bonds when the news came down. Yields jumped almost 8%:

BOND CHART

By the way, remember those comments I made about preferred shares? After the Bank of Canada foolishly chopped rates twice this year, prefs tumbled in despair (while continuing to pay their full dividend), causing gnashing and wailing in the blog steerage section. So, I suggested, buy. Because when it’s evident rates are retracing, these things will roar back.

Here’s what happened to the preferred exchange-traded fund called CPD today.

CPD CHART

Third, the great jobs report and spectre of the rate increase by the Fed fueled the US dollar. It surged. The loonie folded – losing almost 1% of its value, despite a generally positive jobs report in Canada. A 75-cent buck means more inflation and a sickening rise in the price of Fat Boys.

Fourth, since commodities are traded in US$, prices slumped. Oil was hit again, falling almost 1.5% to the $44 range. This happened on a bad day – when the American president announced there will never be a Keystone pipeline to carry Alberta oil to the southern States. It was a big win for the environmentalists who decry ‘dirty’ and energy-sucking Canadian oil, and another punch in Alberta’s gut.

Fifth, Friday was another day of warnings that Canadians have their collective derriere hanging out when it comes to real estate risk. I told you yesterday we took on $75 billion in new mortgage debt in just the last 12 months, and now owe $1.88 trillion – all of which will get more expensive in the next few years as rates normalize. Hope you’re ready.

HSBC Bank Canada president has just sounded the alarm with Bill Morneau, our poor new finance minister, saying, “I don’t like some recent trends in housing,” and asking the guy to man up like F did. In a report to the T2 cabinet, Watt says, “In our view, there is a strong case for further macro-prudential measures to manage potential risks to economic growth and financial stability from the housing sector.” And he’s not the first guy to point out that our love of house porn has totally skewed the economy. Look at this:

SCARY CHART

Meanwhile Capital Economics’ David Madani picked Friday to publish his own latest scary report on where housing is headed. “House prices lost touch with income fundamentals long ago, surpassing the peak of the US bubble almost two years ago. Household debt has nudged dangerously higher. Meanwhile, new housing construction has remained at elevated levels, highlighting our long-held concerns of overbuilding.”

What’s next? “A major correction,” he says. “As we have long argued, the trigger that eventually bursts Canada’s housing bubble is irrelevant and will only be known after the fact.”

Is that trigger the Fed’s first rate hike in a decade? The collapse in oil? A tumbling dollar? The surge in bond yields and mortgage costs? The death of Keystone? Alberta houses auctioned for 60% off? A swelling, unrepayable pile of debt? Families caving after one missed paycheque or a $500 mortgage pop?

Or simply people waking up, looking at the granite and asking, ‘what have I done?’

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November 6th, 2015

Posted In: The Greater Fool

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