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October 20, 2016 | Leadership

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.


In case you were diverted watching Donald Trump’s butt being handed to him, you may have missed this. There’s big news to report from the Bank of Canada.

Our central bankers announced their latest thinking on interest rates this week, as the Canadian economy slumps. If we’re lucky, growth this year will be a hair over 1%. Not much of a rebound after that, either, with 2% expansion (they hope) in each of the next two years. It’s a dismal thing, for sure. If oil fades again, we might have a recession on our hands.

Meanwhile, says the bank, the mortgage changes which came into effect Monday will make it worse. The economy will sag as a result, since housing makes up a bigger portion of the economy than the entire manufacturing sector – plus oil and gas. Everybody (except homeowners in Vancouver and Toronto) now expect a serious fizzle to occur as mucho moisters are kept from indenturing themselves to buy crap houses at bloated prices.

This was the backdrop to a presser given by central bank boss Stephen Poloz. Half an hour before he started, financial markets put the odds of the bank cutting its key rate at 0%. An hour later they were 20% for a cut by January and 25% for one by the spring of 2017.

“Given the downgrade to our outlook, the governing council actively discussed the possibility of adding more monetary stimulus at this time, in order to speed up the return of the economy to full capacity,” Poloz said. Translation: geez, we almost did it, so watch out. While most economists had figured the mortgage bomb Ottawa dropped would allow Poloz to hold the line on rates, he told us something different. Things are worse than you think.

“The federal government’s new measures to promote stability in Canada’s housing market are likely to restrain residential investment,” the Big P added, “while dampening household vulnerabilities.” It means the central bankers actually believe they can reduce interest rates (mortgage costs along with them) and Canadians will not react because of the new regs unveiled this week. Whatever they’re smoking in Ottawa must be good.

Meanwhile markets are giving almost 70% odds that the US Fed will raise its benchmark rate on December 14th. The chances of that went up further Wednesday night when it became more evident American economic policies won’t be changing after the November election. If the Fed does what markets anticipate, there will be two more rate hikes south of us in 2017.

What does this mean? Plenty.

First, if Poloz chops our national bank rate from 0.5% to just a quarter-point, while the Yanks are moving in the opposite direction, we’ll get a dollar at 69 cents or less. That could be reality by the end of the year, or certainly in late winter. If it happens, you’ll wish you had made some US-dollar investments when the loonie was lofty at 76 cents. (Actually, you should always have about 20% of your portfolio in USD.)

Second, this is a bad environment in which to be loaded up on maple. The fact remains a vast majority of Canadian investors have 100% of their wealth in Canadian assets. Traditional bank-owned brokerages are still guiding their clients into huge weightings in moose-and-beaver stuff, heavy on domestic bank stocks, for example. Well, if growth is merely 1% this year with housing taking a whack, is that so smart?

Third, a rate cut by Poloz after Wild Bill’s mortgage mayhem, could negate the bubble-pricking intent in the last two delusional markets, while clobbering everywhere else. After all, no country cuts rates if things are going well – and as the loonie sinks, inflation will roar. Remember $8 cauliflowers? In places where speculators and house-horny millennials don’t move markets (which is everywhere outside of the GTA and Van orbs), none of this is good news. But in our gasbag cities, any rate cut will be seized upon by realtors and the Re/Max marketing machine as proof the meanies in Ottawa didn’t actually mean it.

Well, the jury’s out. National Bank economists say the next Poloz move will be up. Macquarie says the opposite. Capital Economics claims rates will be trimmed again because real estate is goin’ down.

Obviously, nobody knows. Not even Poloz. He’s making this up as he goes along. Inspiring.

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October 20th, 2016

Posted In: The Greater Fool

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