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December 14, 2016 | The Game Changer

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.

money-jar

Well, that’s it. The denial, bravado and fake news is over. Not only did the Fed (as promised) raise its benchmark rate by the obligatory quarter point Wednesday, but the central bankers told everyone to get ready for three more in 2017. Three. Wow. And here I was being covered in chucked tomato juice and old coffee grinds for suggesting there’d be two next year.

This means US rates will be one full percentage point higher in a year than they were yesterday. That’s yuge. Trumpian. Game-changing. So back to the question I’ve been asking you for months. Are you ready?

The hawkish words from the Fedheads sent off a bomb in financial markets. New York stocks raced to a new record high on the initial news then fell back on word of those three more looming hikes. The US dollar roared ahead, cratering gold and crashing oil prices. And because US rates now surpass those here, our dollar was collateral damage, losing a cent.

The big news was over in the bond market, where two-year US Treasuries ballooned to their highest level since way back in the credit crisis of 2009 as the impact of all those rate hikes to come was factored into prices. The yield on a Government of Canada 5-year bond (the one that dictates five-year mortgage rates) soared. It was just 0.484% last February, and tonight has climbed to 1.179%. That, kids, is an increase of 143% this year.

bonds-yield

So it’s easy to see what’s coming. Higher mortgage rates. The Bank of Canada doesn’t need to raise a finger for this to happen. As this pathetic blog has been yammering about for months, when the Fed moves, we all move. The action today, plus the potential now of three more moves over the next 12 months, is signalling the end of an era. The golden age of Canadian real estate. Stick a fork in it. Peak house is in the rear view.

It’s worthwhile noting the S&P 500 real estate sector took a dive after the announcement, since higher interest rates will do some damage to the US housing industry, where average financing costs had already risen by $16,000 since the deification of Donald Trump. This despite the fact most Americans have mortgage rates locked in for 30 years and are far more insulated from rate roulette than Canadians, who have to go back and seek financing every five years or less. Americans also aren’t at peak debt levels (like us), nor have they pushed average home prices into the stupid seven-figure bracket now common even in the soulless suburbs of Toronto and Vancouver.

This is happening for the reasons spelled out here since November 8th. Trump may be completely weird, but just about everyone’s reached the conclusion that he’ll move the needle on US economic growth, cut corporate taxes, reduce government regulation, repatriate trillions in offshore profits, stifle trade outflows, spend a ton of government money, and make inflation great again. The Fed’s acting now, signalling it won’t roll over or allow wages or prices to get out of control as a result.

Even before the election a rate increase this week was a done deal. Lots of new jobs created. Virtual full employment. GDP rebounding, Corporate earnings back in the black. But with the added stimulus of lower taxes, higher spending and a cabinet full of CEOs and billionaires, we’ve moved into a whole new game. The Fed now says “inflation expectations have increased considerably” which is the central bank equivalent of having your underwear combust. Plus the Fed chair – Janet Yellen, whom Trump hates – says she’s going to fulfill her whole term (at least) and will be around until 2018. Thus, expect more tightening. The lady’s serious.

The implications for Canada are exactly as conjectured here, and slapped down by the macroeconomists in the steerage section. Namely: fixed-rate mortgages will start going up soon. So lock in on Thursday. The real estate market will travel in the opposite direction. Already the benchmark average for a single-family home in Vancouver was whacked for a $193,000 decline last month, while Toronto continued to rock. As you may recall, this blog suggested early in July that you bail out of Vancouver. If you’ve racked up big gains on a Toronto property, it’s epiphany time.

Oh yeah. The Bank of Canada. There’s no way those dudes can resist four Fed increases in a dozen months. If they tried, we’d be yakking here about $22 cauliflower. The next rate move will be up, not down, and it will take place in 2017. More mortgage grief.

In short, time to shift some of that net worth from real assets into financial ones. You won’t want to miss what happens next.

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December 14th, 2016

Posted In: The Greater Fool

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