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January 18, 2016 | When Beavers Go bad

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.

 

Will rates fall on Wednesday? Should they? Are we screwed if they do?

More on that below. First a small snapshot of reality.

Jason’s parents, in their seventies, owned a good house in a peachy part of Edmonton for the forty years. They sold a few weeks ago after their blog-addled son prodded for change. “They love the new condo, and are shocked as to how much more money they have!” he says.

All good. But in the process the parentals came face-to-face with the new reality – a slagging economy and bad info. “Point of interest,” adds Jason, “they were offered $455,000 for their house April of 2014 and chose to not sell. When they finally sold in November, they got $320,000. Oops… But compared to this time next year, I think they got a good deal and they are happy.”

Well, that’s a 29% haircut on a detached house in a major Canadian capital city that’s not even at the epicentre of the oil thing. Is any of this hurt being reflected in real estate board stats? Nope. According to local realtor boss, Geneva (Giggles) Tetreault, we’re an ocean of stability:

“2015 was a steady year for real estate in Edmonton. Edmonton and the surrounding areas experienced a decline in sales due to economic uncertainty, but we saw a slight increase in price that demonstrated that the market remained relatively stable.”

The board says sales were down 9% but prices increased 1% – which is all you need to know about realtor math. Yet another example – like Po’ Bill Morneau, who said days ago “Outside investors should be confident about Canada.” – that we’re now a nation of smelly little mushrooms. Kept in the dark. Fed crap.

Oil is at $28, which is 73% less than two years ago. The dollar is 68 cents US. That’s a decline of 11% since T2 was elected and 29% lower than when Stephen Poloz took over the Bank of Canada twenty-eight months ago. The currency has taken a beating in the last week or two on worries Poloz might be ready to cut the central bank’s key rate on Wednesday morning. Again.

DOLLAR

About half of economists think a rate is coming next week. A majority believe one will materialize sometime this year. Everybody got a little rattled last month when the guy gave a speech actually saying the bank would adopt a negative rate if conditions warranted it. With oil down more, the loonie crippled, the street economy declining and negative sentiment swirling around Canada, more people are starting to question whether Poloz knows what he’s doing. There are also many who feel a cut this week would be extreme, and wrong.

Last week bank execs warned another cut here (there were two last year, while the US just raised rates) would hurt margins and presumably lead to the layoff of a ton of people. The head of the national manufacturers association, which you’d think would cheer a cut, says Poloz’s doomer gig is hurting Canada. “The advice right now would be to even take a look at increasing interest rates by a quarter of a point. Interest rates are low already. A little bit of dollar stability would be better.”

CIBC economist Avery Shenfeld is also arguing for brakes: “Cutting interest rates at this point’s mostly about weakening the exchange rate to help exports, and there the hazard is the exchange rate is already weakening on its own. There is a risk of setting off too quick a reduction in the exchange rate that hurts consumer confidence.”

Scotiabank’s econo dudes have the same message: “Cutting rates risks further inflaming sectors already in a state of imbalance, notably housing, while doing little for the rest of the economy.” Worse, more cuts which bring a weaker dollar will cause “massive price inflation” hitting Canadian consumers “for years to come.”

National Bank says a rate cut this week will deliver a 66-cent dollar, and a mess of trouble: “Currency instability has become a concern, and we think the Bank of Canada must take note. For Canadian businesses, currency depreciation has already sent the price of machinery and equipment (73% of which is imported) to a new record high. This is bound to complicate Canada’s transition to a less energy-intensive economy.”

Poloz looks a one-trick pony. By carving interest to the bone he seems bent on devaluing the dollar to the point where we’re just too cheap to ignore – then more of our exports move, Yanks pour across the border to load up on Tim’s Fruit Explosion muffins and the oil sands guys keep pumping because they sell in US dollars while paying workers in fading dolarettes.

But the strategy has a dark side. It guarantees $8 cauliflower, promotes more borrowing by an undisciplined nation, adds real estate risk, discourages investing, penalizes savers and casts a Banana Republic kinda pall over the whole country. After all, when your central bank won’t defend your currency, who the hell will? Money that loses a third of its value against the global standard makes everybody poorer. Is this the best strategy they could come up with?

Wednesday’s an unknown. But the odds are a rate cut is coming then or on March 9th. Now, aren’t you glad you took this pathetic blog’s portfolio advice years ago to have less maple and a fifth in US bucks?

Of course, once the rate hike happens it might be time to vultch.

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January 18th, 2016

Posted In: The Greater Fool

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