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December 12, 2016 | Pucker

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.


Mortgage dudes were just asked this question in an online poll: Will Trump cause Canadian interest rates to pop?

Saying ‘yes, his policies will stoke inflation and drive up rates’ were 54% of respondents. Saying. ‘no, his policies won’t help Canada’s GDP enough to keep rates from falling,’ were 28%. The other 17% of brokers are busy looking for new careers.

You might have noticed every time I try to warn all the little beavers in this mapley paradise that 2% mortgages are endangered, there’s pushback. Why?

First, denial. The over-extended can’t fathom shelling out more. Second, it’s been a decade since anybody paid 5% for a mortgage, and back then moisters were more worried about zits. They just don’t believe increases can happen. Third, a mistaken belief the economy will fold if money costs what it should. And, finally, an unfounded conviction our hipster T2 government won’t allow higher rates – when politicians actually don’t set them.

So, here’s what you need to know as we count down to Wednesday’s Fed increase – the first in a year.

Central banks are associated with governments, but do not answer to them. Monetary policy (interest rates and the money supply) is supposed to be independent from fiscal policy (taxes and spending). The central bank bosses (Poloz here and Yellen in the States) are appointed by governments, but then unaccountable to them. In other words, Donald can’t fire Janet.

These central banks are in place to ensure the integrity of money. For most of our lives that’s meant containing and controlling inflation – which seriously erodes the value of moolah. The more inflation bubbles up, the higher rates generally go in an effort to maintain the purchasing power of a dollar by cooling off economic activity. In the last eight years, of course, we’ve had the opposite trouble – something approaching deflation, with anemic or negative growth. That’s why central bankers dropped rates to all-time lows, to encourage borrowing, spending and hormonal activity.

In Canada, though, it backfired. The economy still sucks (although the latest numbers show signs of life), but debt-snorfling, real estate-speculating borrowers have gone crazy when it comes to loans. Mortgage debt has doubled in a decade, to the point where 26 million income-earners now owe $1.4 trillion. And as debt spiked, so did house prices. Now we face a withering combo: rates at the lowest point in history. Debt and prices at the highest. As I have pointed out here often, there’s a perfect negative correlation between then. Cheap money is crack. We’re junkies.

The Bank of Canada knows this. It wants to raise rates. Desperately. After all, there’s no easy way to come down from a housing bubble, and soft landings are elusive. The longer our central bank’s key rate sits at a ridiculous 0.5% while kids with no money and no credit borrow six figure loans at 2.2%, the worse the outcome will be. That’s why the recent bounce in oil, improvement in trade and bump in job creation are great news for the bank. So’s Trump.

He’s probably the most fickle person ever to enter the White House, but markets have decided he’ll be the Inflation President. With lower taxes coming in after his cut, and government spending amped up for infrastructure, plus the costly inefficiencies flowing from protectionism, traders figure the years just ahead will be completely unlike the ones just passed. Meanwhile the US economy continues to pump out new jobs (180,000 last month), with robust manufacturing, a stable housing market, rebounding corporate profits, record equity  markets and gonzo GDP. Shortly after the election last month the odds of a rate increase this week shot to 100%.

So whether you believe it or not, the cost of money will swell. Pucker up. Coming. Never before have US or Canadian bond markets diverged for long – nor have our two central banks. This time will be no exception. The next rate move here will be up, not down, and likely arrive later in 2017. Long before that, fixed-rate mortgage costs will increase, thanks to the dorfs in the bond market.

Yes, I am repeating myself. But apparently it’s required.

Bankers expect higher rates. Realtors anticipate them. Mortgage dudes are convinced. Traders have no doubt. Governments are preparing.

The ability to lock into a five-year fixed-rate mortgage today at 2.18% is historic. And, like this blog, abnormal as hell. Govern yourself accordingly.

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December 12th, 2016

Posted In: The Greater Fool

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