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January 8, 2016 | Veggie Nation

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.

CAULIFLOWER 2 modified modified

So what are the feds telling us?

Three things. First, inflation’s about to flare and the central bank will not be reacting. So suck it up, beavers. Second, the loonie is almost surely going lower than its current 70.68 cents US. Soon. And third, get ready for another interest rate cut – maybe even as early as Wednesday, January 20th. And what an admission of failure that will be.

Now, understand the context of all this.

The US is, relative to us, killing it. The jobs report out Friday morning showed an astonishing 292,000 new positions created in December, and an improved and restated total for November. This was better than the most optimistic economists had projected and clearly shows the American economy has been (so far) unaffected by an interest rate hike, a stronger dollar, stock market wigglies or global headwinds.

The US jobless rate is down to 5% and holding, despite a big influx of people into the workforce. That’s the lowest level of unemployment since the financial crisis. The report also showed wages have been on the move – now sharply higher than a year ago and rising at an annual rate of 2.5% in the fourth quarter of the year. This means more consumer spending (US car and truck sales just broke a record), leading to higher prices and more inflation. Plus more interest rate increases.

“With the Fed feeling confirmed in its baseline scenario,” Commerzbank economist Chris Balz told Reuters, “the next rate increase is only a matter of time. We expect the Fed to move at the March meeting.”

In fact, unless something unforeseen happens, four rate increase in the US are on the table for 2016, adding a full 1% to the funds rate. Markets are suddenly giving 52% odds for a rate hike in a couple of months, with more to follow, simply because more people working making better money means growth, inflation and a return to normalcy.

At least there. Canada? Meh.

On Friday West Texas oil fell to a 12-year low of just under $33 a barrel. That’s awful. Momentum is negative as the world swims in surplus crude. But the stuff Canada produces – called Western Canadian Select – is totally unloved, and now the world’s cheapest oil. A barrel of that is worth about nineteen dollars US, the lowest since prices were first recorded eight years ago. This oil is below “shut-in prices” which means anyone fool enough to dig it up and ship it will lose money. If exports did not get paid for in US$ while workers were sent home with C$, Alberta would be empty.

BEAVER OIL

No wonder 40,000 workers are out of a paycheque and capital expenditures are set to plunge again. No wonder our trade with the world is in deficit, that our economy may be entering recession and Stevie Poloz regrets ever taking this job. He shocked markets a year ago by cutting rates as oil started to cascade lower. Many believe he’s about to do it again.

Capital Economics’ David Madani has been beating this drum for a while, and how has a chorus around him, with the latest oil mess – and despite stronger job numbers in Canada (+22,000).

“The drop in oil since October represents a negative shock similar in percentage terms to the shock that prompted the Bank to first cut rates in January last year. This time around, the situation feels even more grim, as fears of a slowing China economy have seen prices of many non-energy commodities fall, even after adjusting for the weaker Canadian dollar,” he says.

Factor in higher mortgage rates (thanks to the US Fed – it’s already started, as of Friday), plus the higher down payment rules coming next month, and Poloz knows the housing-oil punch will further weaken the economy. His only weapon is another rate plop – realizing full well it will sacrifice the currency and send veggies into orbit.

“There is a good chance that this rate cut could come later this month, to 0.25% from 0.50%,” adds Madani. “If not this month, then by April at the latest. Either way, we think markets might be in for another surprise.”

You know what to do. Hoard cauliflower!

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January 8th, 2016

Posted In: The Greater Fool

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