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March 27, 2016 | Never Say Never

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.

A bogus report on Chinese house-buying in Vancouver. A sleazy fear-mongering campaign to scare people away from their banks. What else can we put on the menu for an Easter weekend? After all, this is a full-service blog. If you go a week without being offended, we’re not trying hard enough.

So let’s address a canard that deserves to be squished.

Here’s Nathan, with a good and timely question:

“It seems a lot of people have similar questions to mine after reading your blog.  Is it even possible for interest rates to go up much in the next ten years? It would seem that every country (and person) in the world has an addiction to debt and a couple of point swing in interest would probably break many countries ability to pay?  Kyle Bass has said it is impossible for interest rates to go up significantly in our lifetime due to this very issue, don’t you think the number of countries/individuals this would impact would prevent central banks from raising interest rates to a normal level?”

BASS modified  First, Nate, Kyle Bass wants to scare you, because he sells financial products that frightened people buy. Plus he’s a gold nut. Mostly you should ignore him because he’s wrong.

The US raised rates for the first time in a decade in December. You should expect two more during 2016, with the next increase coming as soon as next month. The Fed’s pretty cagey and unpredictable, so we have no real idea when the trigger will be pulled, but the rate will likely be a half point higher by the end of the year. And another 1% above that by the end of next year.

This is because the American economy is doing fine and policymakers wish to steadily reduce the amount of stimulus government injects, in order for more sustainable long-term growth. Plus they worry about debt, and the bubbles that cheap money cause. This is why they ended the monthly bond-buying in 2014 (which Bass and the geniuses here said would never happen) and why we got the increase in December (which Bass and the doomers on this blog swore was impossible).

Normalizing the cost of money is good monetary policy, and every central bank in the world is jealous of the Fed these days. They all want their economies off the junk food of cheap rates. And it’ll happen. Once commodity values creep back you will see a corner turned. Don’t be on the wrong side.

As for Canada, over 90% of the time the bond market here follows that to the south. In fact 93% of the time the Bank of Canada ends up aping the Fed in its monetary policy. So I think you’ll see a higher rate here within the next 12 months. So get ready now. For example, preferred shares – whacked last year by two Bank of Canada cuts – could have a glorious future ahead.

Meanwhile we have this T2 thing going. The deficit, as you know Nathan, was extreme – three times what we were promised in an election just a hundred-odd days ago. In fact, deficits will be the norm for every single year of the Trudeau admin, adding at least $100 billion over the next four years. If he’s elected again, he will certainly trounce the Harper record of $170 billion in new debt over eight years – and he won’t even have a recession to blame. Atta boy, Justin.

Deficits are a form of economic stimulus, since the government will print and borrow more money than it raises from taxes, in order to dramatically increase spending. Deficits today represent additional future taxes, but Boomers don’t care about that because it’s the Millennials who will pick up the tab. BTW, did you hear that Premier Notley now says Alberta has completely abandoned a balanced budget? More deficits as far as the eye can see on a prairie morn.

Anyway, Nathan, we were talking about interest rates. And now that the federal government has assumed the role of stimulator, at the same time the Americans are raising the cost of money, the odds of the next Bank of Canada move being up (not down) have jumped. Our central bankers, like those in Washington, dearly want to restrict credit, end the growth in household debt and prick the bubble housing market before it erupts on its own. They’d like higher rates to support the Canadian dollar, keeping it in a less volatile trading range, to temper the consumer inflation that comes with a limp currency and tackle the destructive meme (which you and Bass espouse) that rates can never go up.

That breeds irresponsible borrowing, and gives us $1.8 million detached houses in Vancouver.

So, use cheap money now to accelerate debt repayment. Don’t binge borrow to buy assets that low rates have inflated. Never believe it’s different this time. And be so careful about what you read.

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March 27th, 2016

Posted In: The Greater Fool

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