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June 9, 2017 | The Odds

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.

 

A month ago nobody thought Canada could, would or should raise rates in 2017. Well, that just changed. In a few weeks the odds have gone from a don’t-bother-me 7% all the way up to a beefy 37%. Yup, that still means markets are 63% convinced the Bank of Canada won’t move in the next 170 days but, wow, this is news.

The reason is simple – more growth and more jobs, leading to inflation, which erodes the value of money. So by raising the price of currency (that’s what interest is), central banks try to maintain an equilibrium. Hence, the odds of an increase in the next few months are approaching one-in-four. As for a move by this time next year, they’re seven in ten.

The latest jobs numbers, out Friday, were unexpected. Over fifty-four thousand new positions, 77,000 of them full-time, and a recovery in wages. In the last twelve months Canada has added 316,800 to the labour force, the most in four years. Moreover, our economy’s growing at a weedy clip, in stark contrast to the oil-induced funk of a year ago.

If it continues more people will be working and spending. But we’ll also see the end of dirt cheap money. Meanwhile the next US rate increase comes on Wednesday, when the Fed adds its latest quarter-point increase. (The odds given that are almost 100%.) This will be the third round of tightening in little more than six months. So much for all the geniuses in the comments section last year who said it would be “one-and-done.” In reality Americans are likely in for two or three more years of this. Us, too. And won’t that surprise your Mom.

So if your mortgage is coming due sometime this year, lock the sucker in. And remember the rate. Your grandkids will want to hear all about the time when money was free.

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Not so long ago the suggestion was made here to slightly increase the Canadian portion of your investment portfolio, and to throttle back on the Yankee exposure. Part of the reason was our nation’s recovery from the mess it was in last year (see above) and part because Trump is so done.

American equity markets have been in catnip mode for much of the last seven months since the election of a guy who promised to cut taxes, spend huge on infrastructure, slash costly regulations and goose the GDP with a pro-business agenda and a cabinet full of billionaire fossils.

So far, fail. Yes, markets have jumped in anticipation and remain hovering around the peak, but the odds of any of the Make-America-Great-Again stuff actually happening diminish by the week. The latest spitting match between the Trumpster and his punted FBI director, James Comey is a fine example. This is destined to go on for months, result in judicial action, and massively distract Washington – whatever the outcome.

The tax package has gone nowhere. Trump’s budget is kaput. No regulations have been shredded. No giant infrastructure projects started (even The Wall). Instead the president is spending his time on a silly anti-Muslim travel ban, jumping into a contest with a wily bureaucrat and pissing off key European allies, like Germany and Britain. His abdication of the Paris climate change accord shocked the world, and his social media usage is destroying Trump’s effectiveness, 140 characters at a time.

Markets roared ahead late last year because a pro-business, anti-tax Republican had been elected president at the same time his party controlled Congress. How could he not get his agenda through?

 

Well, whatever you think of the guy, he’s cooked as a market-inflater. Were it not for sustained job growth and a resurgence in corporate profitability (neither of which can be attributed to a six-month-old administration), today’s equity valuations might look wobbly with this mercurial man in control. Current weightings in the growth portion of the portfolio: Canada 21%, US 16%, International 23%.

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Thomas has been an appraiser, he tells me, for thirty years, mostly in the east end of the GTA. He called to say his job just turned into a living hell because what a house is worth today is not what it was worth a week ago.

“The real estate board says prices fell 6% last month,” he says, “but I’d say it’s more like 15%. Besides, we’re being told by our bank clients to shave another ten or fifteen points from that before submitting the report.”

It’s all about risk. Lenders figure we’re now in a declining market phase which could last months, a year or much longer. Caught in the vise are buyers who purchased unconditionally in a bidding war, paid a premium, and now find the financing they counted on ain’t there. At the same time, those who bought and closed six, eight or 12 months ago with a 10% or 15% down payment have effectively lost 100% of their equity. It may come back. It might not.

“Part of me feels sorry for a lot of the people who paid he amounts in this region,” Tom says. “But part of me is okay with it. They took a big chance. We all knew this was coming.”

Indeed.

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June 9th, 2017

Posted In: The Greater Fool

One Comment

  • Avatar Tim Neilson says:

    Your wrong Garth. If the Fed raises a quarter point this week it will be the last this year. Canada’s not raising rates anytime soon. Deflation has a firm had in most western economies, interest rates have NOT bottomed. The U.S. Ten year treasury is & will be going lower, along with oil prices. Time will tell which of us is right.

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