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March 6, 2017 | Too Good

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.

Remember last March? Sure ya do. The doomers and nihilists were shedding all over this pathetic blog, telling you the world was going down for the count. There’s a lesson in here (of course).

Oil cratered at $27 a barrel. Wow, a 70% collapse. The Canadian economy was sinking too, actually in recession. The TSX was a mess. China was the big news – volatile markets, flaky leaders, rampant speculation by little investors. On the horizon was Brexit. Trump also (although he was too weird to take seriously). US data was weak. Markets were weak. The Fed looked weak. Negative yield bonds. Preferreds tanking along with rates.

What did I say then?

“The commodity price rout is likely overdone. After all, the value of oil, nickel, copper, grain and other stuff we all need has plunged to 1990s levels, completely illogical given the fact global growth is positive, not negative. Tanking prices for hard stuff were understandable in the dark days of 2009, but not now.

“The American economy is doing exactly what was forecast here – swelling methodically, steadily and predictably. In the end, it will probably drag the entire world to a better place, which will include higher interest rates.”

Well, it took twelve months. But here we are. Oil’s doubled. Financial markets are at record highs. Interest rates start rising in seven business days. Inflation, growth, profits and jobs – all up. China’s cool now. Trump may be a nutbar, but he’s a pro-business one. It’s catnip for investors. Even the shock of Brexit wore off in a few weeks. Le Pen is next – and populism’s becoming a yawner.

In short, the hairshirt guys failed. Things got better, not worse. People in cash or gold went nowhere. By the end of 2017, Bay Street was ahead by double digits, US markets gained 7% in two months and a balanced, conservative 60/40 portfolio had clocked 8.5%.

Of course, a detached house in Toronto did better, but it came with a mortgage, utilities, property taxes plus maintenance, while paying out no income and giving no realized capital gain. And with each passing day, that windfall paper profit grows a little more uncertain for those who have concentrated their wealth (and their risk) into a single asset.

Ironically, the big worry for Canadian homeowners should be that things will get better. My, what a difference a year makes.

In mere weeks the odds of a rate increase in March went from one-in-five to one-in-one. That rarely happens, setting the stage for three hikes in the next nine months. We haven’t seen that kind of Fed activity upward since 2005 – when the swelling bank rate played a key role in collapsing the US housing market.

Odds of a US rate hike next week are now near 100%.

Why is this taking place? Mostly because interest rates at one-half of one per cent are no longer needed or appropriate. They cause people to borrow excessively, inflate asset values and artificially stimulate the economy. Need proof? Look at Canadian housing market. Wages up 1%. House prices up 20% – just because mortgages are so damn cheap. In the US the Fed has determined that the data (growth, jobs, profits, incomes) is strong enough to allow the cost of money to move from ‘ridiculous’ to ‘sorta normal.’ Especially with Trump in the wheelhouse, about to chop taxes, stimulate GDP and make inflation great again.

Second, conditions around the world (the North Korean madman and ISIS excepted) are a lot less scary. Global growth is forecast to be a decent 3%. Suddenly China looks more mature and better governed than the US. The EU did not quickly die with the British vote to exit. It may even survive the overtly racist and wildly popular Marine Le Pen in France. Chinese factory production has recovered. More Europeans are working than at any time since the credit crisis.

So don’t be fooled. If the Fed pulls the trigger three times this year, the bond market will react strongly, and Canadian fixed-rate mortgages will rise. If our central bankers remain too timid to follow, the loonie will certainly suffer, bringing higher inflation and an erosion in the purchasing power of most people (remember $7 cauliflower?). Then eventually the Bank of Canada will also up its key rate, because that’s exactly what it’s done 92% of the time. You can bet against those odds, if you want. I wouldn’t.

Now, remember this chart? We personally owe $2 trillion. More than the economy. 65% in mortgages. The orange bars – out of control.

65% of our 2 trillion in personal debt is in mortgages

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March 6th, 2017

Posted In: The Greater Fool

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