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September 9, 2016 | The Big Moment

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.


Whoops. Was that a topping point there in the rear view mirror?

As the trading day slid by on Friday, more and more investors worried about that. When the last deal was done, New York had shed almost 400 points and Bay Street was skinnier by over 250. The biggest selloff since Brexit was unique. While that last dump by stocks came with a surge for bond prices, this time everything went down together. Interesting. What’s it mean?

“This is a big, big moment,” a New York CIO told Bloomberg, as every trading board in the world bled red. “Interest rates have bottomed.”

Blame it on central bankers – who these days have more influence than the weather. On Thursday the head of the European Central Bank (Mario Draghi) strongly suggested rates won’t drop anymore and everybody should stop expecting that to happen. A day before Bank of England head (and Canuck) Marc Carney said the same thing. Then on Friday the Fed really amped things up when official Eric Rosengren warned that without a rate hike soon the US economy will overheat, get inflationary and turn into a Samsung Galaxy 7 bonfire.

Well, up she went.

The odds of the Fed raising rates in 11 days from now rocketed higher to 38% – up a huge 16% from Wednesday. Similarly markets are putting the chances of higher interest rates by the end of the year at 60%. This is all the more salient given some weak economic data lately, like a tepid jobs report, lousy manufacturing data and a kerplunk by the services sector. It suddenly seems like central banks are saying this: enough, already. We’re done.

So, the bond market went a little nuts, Yields spikes and prices plopped. US Treasuries tanked as rates climbed dramatically. German bonds rose from negative to zero for the first time in two months – up almost a fifth of a point in two days. Ten-year American government bonds jumped to almost 2.4%, after a summer drifting lower. Ditto in the UK and Japan. Meanwhile global equities slumped, in fears the central bank money tap has truly been turned off.

Now, this is fascinating but not fatal. Normally stocks and bonds are negatively correlated, moving in opposite directions. When they fall or rise together, something is definitely up. A fundamental change, or at least the anticipation of it.

Markets will adapt and likely restore their values. But if the tipping point has passed and we are moving now towards a normalization in the cost of money, however gradual that might be, then it matters a lot here in poor little Canuckistan, land of the debt-snoflers. As you know, a household debt-to-income ratio of 450% and more is normal among million-dollar home buyers in places like Toronto, where everyone’s supposed to be rich. Over 90% of all houses in Vancouver are ‘worth” at least $1 million even though household income is low and going nowhere.

We owe $1.2 trillion in mortgages and new debt is rising four times faster than wages. Last month, say GTA realtors, sales and prices shot to historic levels (if you believe them). And a new survey out this week is truly scary.

The poll by the real estate regulator found 57% of home-buyers in Toronto would exceed their maximum budget to win a bidding war. Of those, almost 40% said they’d spend 20% more than their budget – which equals almost $150,000 for the average digs. Yikes. And here’s another poll by CREA (the real estate guys are starting to get spooked) which reveals a third of all buyers are willing to bid on a house without even knowing if their financing has been secured.

No surprise here: the moisters are at greatest risk of doing such dumbass things as submitting an offer without being pre-approved, or any conditions on financing or home inspection. In fact, 42% of the damp ones admit “emotion” is a driving factor in their house horniness and questionable buying practices.

Now, recall the payroll findings this terrifying blog shared with you two days ago? Sure you do.

  • Half of people would be screwed if they missed a single paycheque. Even for a week.
  • Four in 10 spend 100% of their net income.
  • A quarter don’t have $2,000 and couldn’t get it within a month.
  • 50% can’t save 5% of what they make and 39% are ‘overwhelmed’ by debt, mostly mortgage debt.

So imagine for a brief minute that all the world’s equity and debt markets are correct, as opposed to your mom. Imagine rates have in fact bottomed and will inexorably wiggle their way higher over the years to come. Then, with wages stuck and debt so epic, why would houses go higher? Or stay high? Or not fall?

The extreme leverage that worked so well for some homeowners on the way up will work just as powerfully on the way down. Emotionally-driven kids over-bidding on assets that have never cost more with debt that will never cost less have much to learn.

There’s a point at which LOL gains tip towards OMG losses. Yup, back there.

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September 9th, 2016

Posted In: The Greater Fool

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