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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

November 11, 2015 | No Reprieve

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.

Yesterday I told you this post would be about ponies and sunshine. I lied. Get over it. Moreover, what would you expect from a blogger who several times this week was accused of being misogynistic, gender-exploitive and suggestive? Clearly I’m a politically-incorrect, sex-blind, insensitive fossil, which makes me the perfect financial guy. Take your emotional baggage elsewhere. Unless you’re a border collie with dreamy eyes, I’m immune.

Okay, so the next time Canadian interest rates might change is in exactly three weeks, on December 2nd. Unless oil goes to thirty bucks or Justin joins the Chippendales, expect no change. The economy may be dragging, but a rate cut will murder the dollar and send a distress signal to markets coming just two weeks before the Fed’s expected to raise rates (now a 70% probability).

Besides, the expectation of higher interest costs is already out there. Many mortgage rates increased Monday by ten basis points or up – not a huge amount, but certainly a move in a direction most people thought was impossible. There’s more to come, as Canadian bond yields continue to slowly swell in expectation of the Fed move and in response to the US debt market.

Speaking of the yanks, the 30-year fixed mortgage rate there is now at 3.83%, a rise of 17 basis points (almost a fifth of a per cent) in a week. Big move.

Says Zillow: “Mortgage rates moved decisively higher last week as the commentary of several Federal Open Market Committee members and an exceptionally strong jobs report solidified expectations for a December Fed rate hike. Markets will look for further signals about the strength of the economy in inflation and consumer confidence data.”

US rates have more of a regional bias, so it’s interesting to see the increase was larger (a quarter point last week) in hot housing markets like New York, Chicago and Texas. The next big day is December 16th, when the Fed actually announces its decision. Given job creation of 271,000 last month – blowing past all expectations and forecasts – this is looking increasingly like a done deal.

And make no mistake about what this means. The significance is not just a quarter-point move higher after emergency rates being in effect since the Great Financial Crisis. Rather it is the end of overly-accommodative monetary policy. First the massive monthly government bond-buying program ended a year ago (the basement-dwelling macroeconomists who read this pathetic blog said it would never happen), and now cheap rates will end (they’re saying the same thing).

The Fed does not raise once and stops. Or twice. Or thrice. The average number of increases is 10. Between the summer of 2004 and the autumn of 2007, in fact, the Fed raised them 17 times. The average duration of rate increase cycles has been just under two years. And investors, by the way, should know that during these periods the stock market gained an average of 23%. So higher rates may be a death rattle for real estate, but that’s hardly the experience with equities.

This is exactly why these guys (and Mrs. Yellen) have been so anal about starting, and have shown such concern for economic data, both American and global. Once they get going, in other words, they keep going. The goal this time will be the normalization of rates – which is about 3% higher than now.

Yeah, it will take time. A few years. But that’s the path lying ahead. It’s just too bad so few people understand that.

Also weird is the sentiment routinely seeping out of the steerage section that “the government” will move in and rescue fools who bought slanty, bug-infested Leslieville semis for $900,000, or shaggy Vancouver Specials for $1.2 million, with mortgage forgiveness, 40-year amortizations or homeowner grants. Ain’t gonna happen.

The feds, in case you missed it, are broke. Even before the Liberal spendathon begins. We’re looking at years of double-digit deficits just pouring cement and creating temporary jobs, without bailing out any idiots who bought houses they couldn’t afford. Second, this is why you have tax-free capital gains on real estate – because nobody’s going to move in and save your ass when when things go sideways. Suck. Blow. Pick one. Third, everybody has been told and retold that low rates cannot last. If you didn’t listen, tough.

Anyway, I apologize for my maleness. It’s just so awesome.

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November 11th, 2015

Posted In: The Greater Fool

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