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November 29, 2015 | Doomers

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.

 

He’s a billionaire. Sold his Toronto tech company to a megacorp. He also reads this blog. Posts anti-Garth comments. And he’s a doomer. The US is screwed, he says. Rates will never rise.

“I think you are only allowed to cry interest rate going up wolf 3 times,” he wrote lately. “You are going on 20 right now. Do you really want a 21 on Dec 16th? At least, can you admit that you’ve lost ALL credibility on this issue if I am right and you are wrong on Dec 16th?”

He called one day and I asked him where his billion is. “In GICs,” he said. Very progressive, I replied. Hope you like paying a load of tax on interest you haven’t received. Then he vowed if America indeed raises rates in two weeks he’ll actually invest his money. “But it won’t happen.”

But it will. At least that’s the call today, with financial markets currently giving 74% odds the US Fed will end almost a decade of cheap money at its next rate-setting meeting, scheduled for December 15-16. We’ve already discussed the implications here, including a bank forecast that this will up fixed-rate mortgages by almost three-quarters of a point, just as oil creep topples most markets. Already loan costs are swelling. So is the billionaire dude just another doomer loser?

This week will tell us a lot. Monday sees Fed boss Janet Yellen speaking to the Economic Club of Washington. Will she once again say a rate hike in a few days is a “live possibility”? The next day she slides into the witness chair before a Congressional committee, where there’s a 10% chance she’ll be asked if the US economy is strong enough to weather higher rates. And the day after that we’ll find out, when the November jobs numbers are released.

As you know, October’s stats killed it. More than 270,000 new positions were created – the best showing all year, dashing arguments the American economy had slipped into neutral, or worse. Expectations are for about 200,000 to be the headline number this week – judged to be seasonally strong and evidence the Fed is poised for lift-off the following week.

As also pointed out here, rates never rise once and halt. Or reverse. The very reason this initial increase has been so tortuous in its timing – anticipated month after month – is Yellen’s refusal to pull the trigger until it’s clear a tightening cycle can begin. The goal is to bring the cost of money into a historically normal range, so cheap loans and excessive liquidity stop distorting things like real estate and equity prices. That means a series of increases paced over a couple of years – and assiduous thought given as to when it can start.

Doomers say rates can’t rise, however, since this would jack the value of the US dollar – already appreciated by 10% in 2015 – and whack American exports. They argue higher rates will inflate the cost of carrying all government and private debt, so central banks would never risk it. And nihilists claim official stats – on job creation or economic growth, for example – are bogus, fraudulent and fabricated as part of a wider conspiracy concocted by our overlords. Yes, the same criminals who fill our skies with chemtrails, our water with flouride and have just invented carbon taxes.

Well, we’ll know soon enough. This has been the longest stretch in history where interest rates have not been increased. Something previous generations never noticed much, let alone debated, has turned into a symbol of human struggle. Especially here. Few people on the planet have shoved their snouts deeper into the debt trough than Canadians, who have again shattered all records for snorfling. In 2015 we borrowed money at five times the rate of wage increases, and three times the rate of inflation. Never before have people retired with as much unpaid debt, or started their careers with such epic loans. On Friday I showed you the most recent CMHC tally of new insured mortgages – the average borrowing equals 92% of the value of the houses purchased. So if bloating rates or moribund oil cause real estate values to decline just 10%, all equity is poof.

That won’t crash house values. It won’t send the economy into recession. The banks will still make money. People will continue to believe electing spend-and-tax people like Rachel Notley and Justin Trudeau was clever. The shrinkage will be quiet and the denial loud. But the damage of higher rates and lower times will be real for people who bought what they could not afford and felt entitled doing it.

This pathetic blog has done its part in the debate. The wolf’s still at the door. It won’t hold.

Wonder how much Starkist and ammo a billion buys?

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November 29th, 2015

Posted In: The Greater Fool

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