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January 5, 2018 | Up She Goes

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.

On Thursday night, swaps trading (no, not what you think) put the odds of a rate hike in a few days at 40%. By Friday morning that had almost doubled. By noon most of the bank economists had piled on, boldly forecasting the central bank will pull the trigger again a week from Wednesday.

The dollar spiked – close to 81 cents, the best show in months. Bond yields jumped. Two-year government debt saw the greatest increase in almost seven years. By the end of the day a rate hike was baked into everything, thus for the third time in six months the cost of money will be going up. So will variable-rate mortgages, personal lines of credit, demand loans, HELOCs, business loans and credit card rates. High-interest savings accounts and GICs? Don’t be silly.

The country has apparently turned into a jobs machine. Exports are swelling just as the real estate market starts to go down. There were 78,600 positions created in December, wildly more than predicted, with the jobless rate falling to a four-decade low of 5.7%. So in 2017 over 422,500 new jobs emerged. Best in 15 years. In the last three months, 193,400 people found work. Biggest 90-day pop since “Disco Lady” topped the charts.

Yup, lots of these are part-time, but over the course of the whole year most were full-time permanent positions. In fact more FT hiring took place than at any time since 1999, when the average Millennial was eight. The most manufacturing jobs in six years, too. Average hours worked are increasing. Wages, too. The gain in incomes is 2.9%, now running ahead of inflation – big change from a couple of years ago.

What’s it all mean?

More inflation and higher prices. That’s a given. Ontario’s ill-timed minimum wage boost (and the one coming in Alberta) will help push that along, plus more taxes coming in the T2 budget now just weeks away. But big job growth means the economy is expanding and employers are more confident, which will likely push Canadian equities higher as bond prices fall. Remember a few months ago how this blog told you to augment the maple in your portfolio? Now you know why.

But the big impact of a rate hike in 12 days, then two more (at least) during 2018 will be on housing affordability, average prices and the decreasing equity of homeowners across the country. As mentioned, five-year mortgage rates will be north of 4%, about double levels of less than a year ago. New borrowing rules (the stress test) are raising the bar even further and negating some of the impact of the Bank of Mom, since a 20% down payment no longer matters.

While the cost of borrowing goes up, credit is restricted and housing values inevitably drop, since people can afford less. That’s one part of the equation. The other is supply and demand. As mentioned here this week, for example, sales in Toronto declined 18% while the number of active listings skyrocketed 172%.

Prices went stupid-ballistic last winter because mortgages were the cheapest ever (2%) and the number of available listings withered. Thousands of homeowners who could have scored windfall profits said, meekly, “but if we sell, where will we go?” And so they missed peak house. In 2018 they might find selling takes months, causes huge stress, and results only in offers from vultures. Classic behaviour.

All of this is to remind that no asset rises without end. All booms finish. Every bubble breaks. Prices revert to the mean. It’s not different this time. It never is. Never was.

Recency bias – believing what has just happened will continue to go on – is the downfall of so many investors. Be it houses, cryptos, weed stocks or gold, the pattern repeats and repeats. Sooner or later, wise people learn there’s no silver bullet, no home run, knockout or one-asset nirvana. Meanwhile the fools buy high, sell low, then complain life’s unfair.

Balance, diversification, liquidity – these things will sustain you. Start today.

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January 5th, 2018

Posted In: The Greater Fool

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