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June 27, 2016 | Now what?

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.

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What will Brexit mean to you? Your investments? Your house? Your mortgage?

So far, we know this: Stock markets in North American have shed about 6% of their value over two sessions. Sucks, but not a crisis. The losses on Day Two were one quarter of Day One, and those people with a balanced portfolio have seen a big boost in bond prices which helped offset the equity plop. Nobody should sell into a storm, especially one caused by an unexpected event, not economic rot.

But there are other things more vexing to Canadians. Oil has tumbled from $51 a few weeks ago to $46 now, a 10% decline we didn’t need. Add in the Fort Mac wildfires, and it’s likely our economic growth will barely move the needle in 2016. Brexit not only accentuates the commodity rout (the US dollar goes higher and demand for energy falls as Europe weakens), but also hurts our UK-bound exports.

Here’s what TD Economics thinks: “Based on our model simulations, we estimate that confidence and financial spillovers from a leave result could shave about 0.5 to 1.0 percentage point off GDP growth for the U.S. and Canada in the second half of 2016, driven mainly by an expected reduction in business investment growth as a result of a rise in global economic uncertainty.”

So the currency goes down. The loonie now struggles to stay above 76 cents, shedding all of the gains made since the winter lows. Remember all the $8 Cauliflower Angst on this blog? Like a fetid veggie, it’s coming back.

Here are some reasonable conclusions:

First, markets will absorb the shock – at least in North America – and stabilize not far off current levels. This is not 2008. Not even close. The Brits are eviscerating themselves, casting serious doubt on the future of the biggest free trade zone at a time of slow and wobbly global growth. That’s all serious, but no apocalypse. China benefits and ultimately the US as well. This is digestible. If your investments are balanced and diversified, leave them alone.

Second, interest rate hikes are toast. The Bank of England will cut its key rate by at least a half point in early August. The US Fed will not carry out its planned pop in July. The Bank of Canada  but may even contemplate another cut if oil travels toward the $40 mark. Then we can yak about $10 cauliflower.

Third, don’t expect this to carry over into lower mortgage rates. None of the above is great news for the economy, jobs, incomes or bank earnings. Risk has been augmented, and at the same time the T2 gang is trying to douse the housing flames in the GTA and YVR. One big tool will be to shift more exposure from CHMC to the lenders. The end result – mortgages stay about where they are even if rates in general decline.

Fourth, Britain just got whacked, losing its Triple-A credit status, with at least 3.5% of its economic growth cancelled over the next two years. That’s ginormous. Foreign investment in the UK will wane and monetary conditions around the world get looser. The Bank of England is already flooding the land with freshly-printed pounds, while the ECB continues to spend billions on bonds every month in a massive stimulus program. The direct beneficiaries of this will not be working-class Brits who seek better incomes, but investors with financial assets gasbagged by new liquidity.

All this makes Canadian bonds look sexy by comparison. Expect yields to go down and prices to rise, even as the economy in general slows markedly and job creation disappoints. Slower foreign demand for Canadian exports and any protracted decline for commodity prices (especially oil) would mean harder times for most regions of the country.

And while it’s hard to see any of that being good for residential housing prices, some people think a lower dollar and an exodus of capital from Europe will plump values further in our bubble cities. They’re also thinking that way in Australia, the other place where house horniness is a national disease. Maybe the property pimps are right. The perception that rates will stay lower for longer, and that land’s inherently safer than equities may drive more into a realtor’s embrace. Good luck with that.

In conclusion, Brexit is good for bond holders and likely bad for families. Central banks will paper. Portfolios will recover. Economic growth will falter. Thus the workies, not the wealthy, will pay. Was this the goal?

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June 27th, 2016

Posted In: The Greater Fool

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