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December 9, 2016 | Lessons

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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Why’s Wednesday such a big deal?

For the first time in a year and the second in a decade, US rates will go up. Unless everybody’s been fooled, it’s the resumption of a trend that was stopped cold last winter when Chinese markets blew up, oil and other commodities collapsed and the economy ground to a halt.

Since then, mucho change. The US is doing fine, oil’s almost doubled and we’re now worried about inflation instead of deflation. Last winter bond yields were sinking and the steerage section was convinced banks would start paying people to take negative-rate mortgages. This winter it’s evident we’ve bounced off the bottom, with home loans already on the way up. A year ago we had two bubbly real estate markets left. Now there’s but one. And the last time there was snow, there was no Trump.

Last January the Toronto stock market was over three thousand points, or 29%, lower than it is now. The S&P bottomed a week or two later, now 23% higher. Last winter Canada was in recession – contracting. Lately growth has been 3.5% – swelling. Ditto for the US, where job creation has averaged about 200,000 a month and the economy has reached technical full employment. When Obama took office the jobless toll was above 10%. Eight years later it’s in the 4% range.

Moan all you want, but this is an improvement of epic proportions. The TSX, for example, gained more than every real estate market in the country, without any property taxes, commissions, land transfer tax or cable TV bill to pay. And it looks like there’s more to come just as it appears real estate in most places is headed in the other direction.

So what’s next? Tom wonders.

“Love your blog. Well written. Great topics,” he says, sating my need for syrupy subservience. “I have a suggestion (if your email filter doesn’t automatically put the words “I + suggestion + blog” straight into your spam folder).

“Higher interest rates are coming.  It would be nice to see a post about this.  First part “best case scenario”. Second, “likely scenario”. Third, “worst case scenario” for 2017-18.  As far as I know, we follow the USA 90% of the time in interest rate hikes so it’s kind of out of our hands but the consequences are all ours.”

Sure. While we actually have no idea what’ll happen over the next twelve months, here’s a prediction. The Fed will move on Wednesday by a quarter point. The odds of that are still 100%. Then the US central bank hikes twice more in 2017, for a half-point gain. So by the end of next year the key rate will have gone from an effective 0.25% to 1%. That’s big.

Yes, Canada has a track record of aping US moves more than 90% of the time over the last quarter century. This time will be no different, but there’ll be a lag of several months. In other words, don’t expect more than one increase from the Beaver Bank in 2017, but then a couple the year after – assuming Trump doesn’t nuke North Korea or appoint Beyoncé to anything. As US rates increase, strengthening the US currency, ours will fade. So expect lots of inflation – $7 cauliflowers and $30,000 Harleys.

Mortgage rates will jump regardless of when our central bank moves. Fixed-term rates are set by the bond market, and while yields on Canadian debt will lag those on US bonds, they will be rising from current levels. So the best-case scenario is status quo for the Canadian prime until maybe the autumn, with modest plumping of fixed-rate mortgages, then up. The likely case is that all consumer loan rates – including personal and secured lines of credit – will be up to 1% more expensive by this time next year. The worst-case is that Trump turns out to be the Inflation President and the Fed embarks on a consistent, multi-year tightening of the kind seen several times in the past. That means six to ten increases over two to four years.

If you doubt any of this, look at gold. The certainty of higher rates, more economic expansion, government spending, surging bond yields and seductive equity markets has sucked the life out of the yellow rock. Bullion has been clobbered for 15% of its value since Brexit alone (the end of June). It now trades for $800 less an ounce than it did five years ago – when lots of silly people thought the US was going to run out of money and default.

So, Tom, there ya go. It looks like we’ve turned a page.

Yes, things can go off the rails. Yup, a very strange man now leads the western world. You bet, it’s scary.

But the era of real assets is kaput for a while

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December 9th, 2016

Posted In: The Greater Fool

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