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January 17, 2017 | Ready or Not

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.

Preferred shares scored in the last twelve months. As forecast. For example, the exchange-traded fund called CPD gained 21% since the lows of January past, beating every real estate market. Plus it came with a 5% dividend yielding cash flow. (Did your house do that?) And a dividend tax credit. The only things missing were a pony and a tummy rub.

Preferreds have rebounded because bonds have declined and yields swollen. Looks like there’s more to come, three days before the Inflation President ascends his golden throne. Protectionist, expansionary and pro-business, Trump’s expected to slice corporate regs, slash business tax rates, skew trade deals and measure his success not in social justice but GDP. Prices, profits and wages go up. Markets, too. And rates. Get ready.

On Wednesday the Bank of Canada reacts to this. No, the cost of money won’t change here (that comes later) but we should get a read on how our central bank will response in Trumpian times. Recall that our bank rate is now an in-the-ditch 0.5%. It can’t stay there. It will not be cut. This is it, kids. Ze bottom.

The Canadian economy has been doing better lately, as the following chart of our trade shows – the first weensy little surplus since way back in 2014. Plus the latest labour stats were great. And Justin Bieber has just traded his man bun for bangs. So it’s all good. We’re on the path.

The question for bank governor Steve Poloz is how much risk Trump poses. Obviously whacking Canadian cars with a 35% border tax would be a disaster, or imposing the Border Adjustment Tax that we referenced here the other day. Or telling US oil producers to frack their little hearts out in the name of jobs and US energy independence. Or cutting American corporate taxes to a level well below ours, sucking off investment capital. Or ripping up NAFTA. Time will tell. Let’s see what the guy says in the morning.

So why are swaps trading showing a 33% chance that Canadian interest rates will actually rise this year?

Part of the answer comes from what consumers have been up to – driving residential real estate prices higher and swallowing unheard-of amounts of debt in doing so. Higher rates would target that activity, especially combined with things like Ottawa’s tough new mortgage regs of last October, and CMHC’s third insurance premium hike in four years, announced this week.

Meanwhile one of the world’s biggest money managers, Vanguard, says categorically that our central bank will pull the trigger later this year, upping its key rate by a quarter point – which would be a 50% increase from the present level.

Says Vanguard’s chief economist: “Our contention has been and remains that the U.S. economy and the Canadian economy would remain resilient, even in the face of the ferocious commodity sell-off and even with the froth in the housing market. I think the recent data toward the end of 2016 only bore that out. I think it’s appropriate to have modestly higher interest rates.”

At the same time, US rates are set to increase (Vanguard adds) in both March and June, with Poloz popping some time later. Moody’s Economics agrees – a quarter point increase in Canada in the autumn – while Deutche Bank says the cost of money in Canada will be higher in the last 90 days of 2017.

It’s a big deal. Our bank’s last two moves (in 2015) were down. Rates have been crushed for the past eight years – long enough that a whole crop of Millennial housebuyers can’t even remember when a mortgage cost 4%. Just look at the comments on this site every time anyone warns that interest can go up. They’re not buying it – understandably, given nobody wants to reflect on their own financial vivisection.

There it is. Friday. Wave normal goodbye.

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January 17th, 2017

Posted In: The Greater Fool

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