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November 25, 2016 | Desperado

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.


Sigh. Another day. Another record high. The Trump rally for US equities has closed out its third consecutive week of giddy gains, as investors continue to cross the street from the Bond Market to the Stock Market. On one side, tears. On the other, tingles.

As detailed here, the bond rout is based on expectations of big spending, big tax cuts, big deficits, big profits and big inflation over the next few years. So, bond prices fall and yields surge. US Treasuries have added over half a point (yuge), Canadian government five-bangers have all but doubled since July, and mortgages have risen in sympathy.

The Fed will increase in three weeks, and more to come in 2017.

But what about Canada? Is it a slam dunk rates will rise in this country?

Sadly, not. The next rate change date in this frosty land comes December 7th. Nobody expects any move then. But look out for what might happen March 1st, April 12th or May 24th (bring beer). On those rate-review dates, a growing number of economists believe, our central bank could throw in the towel and admit the country’s somewhat pooched by lowering rates from a pathetic 0.5% to a tragic 0.25%.


As our tat-wearing, weed-smoking, shirt-doffing hotty leader knows, it’s all about stimulus. In this case, it’s monetary – dropping rates as an attempt to kickstart an ailing economy. If it happens, it would be an admission that (by then) almost two years of T2 governance, higher deficits, more spending and promises to create oodles of jobs through deficit-financed infrastructure programs, failed. It was just words.

Economic growth in 2016 will be 1%, if we’re lucky. (Recently the US has been cruising along at three times that.) Our trade deficit is epic. A record. The dollar’s mired below 75 cents US. Job creation has been erratic and inconsistent. But the real reason you might see a rate cut (some believe) within the next six months is, of course, Trump.

The mercurial president-elect has already said he will trash the TPP trade deal on Day One of his deification. During the election campaign he also derided NAFTA, and has yet to spell out the way America will insist it be rewritten to favour domestic workers. In any case, this much is clear: it won’t be a better deal for Canada. And until the details are known, this causes uncertainty – which hurts business investment. That costs growth and jobs.

The Bank of Canada was really counting on a pickup in capital spending to get things firing again in 2017, especially since it’s pretty certain real estate is going down. Given the combination of the Moister Street Test, the creep in mortgage rates (which will occur whatever the central bank ends up doing) and a weak labour market, housing won’t be bailing us out. Remember, house lust accounts for about 15% of the country’s total economy (more than oil and gas, more than manufacturing), so when real estate cools, so does everything else.

TD now says there’s a 40% chance our bank will cut its key rate once in 2017. Capital Economics is in the same camp. Ditto CIBC. Desjardins says to expect, “…tighter financial conditions here in Canada, including the housing market, which was already subject to tougher macro-prudential regulations.”

So what does this mean?

First, fixed-term mortgages are not financed according to the central bank’s key rate, but rather in the bond market. There yields have been rising since the last US election results came streaming in. So the recent 30-bip jump in home loan costs at RBC are a good indication of what lies ahead.

Second, a Bank of Canada rate nip is not good news. These guys only chop when all else has failed, and already rates are in the ditch. Any move lower by the Bank of Canada, when the Fed is tightening and the US expanding, will be seen as a fail. Desperation.

So, third, the dollar will be a certain casualty as the spread widens between US and Canadian rates. If you think 73 cents is embarrassing, just wait. And be so thankful you followed this blog’s long-standing advice to have 20% of your portfolio in US$-denominated securities, and keep maple to a minority (17%) of your growth assets. Hopefully you also took the suggestion, when the loonie was above par and houses in Phoenix were selling at a 70% discount, to buy one or two.

Such gifts are gone, now that America will be Great Again.

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November 25th, 2016

Posted In: The Greater Fool

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