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January 17, 2018 | Mr. Obvious

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.

The bank rate may have jumped just a little Wednesday but we passed a giant milestone. It says ‘5’.

The five-year posted mortgage rate at all of the banks has now jumped the 5% mark. With this week’s CB pop the Bank of Canada’s benchmark mortgage rate will also pass the five level. Add the B20 stress test and anyone borrowing will have to qualify at a minimum of 5.14%. In reality, most will have to pass 5.5%. By the end of the year that may well be 6%. So, get ready. Obvious consequences.

“It’s like that proverbial switch being flipped,” an east-end GTA professional appraiser told me two hours after Stephen Poloz puffed the cost of money. “This market is dead. Finished. Most of the work I’m doing now is for refinancings as people just try to stay afloat – and the values they’re still putting on their places are laughable.”

Likely fallout: house sales tank for at least a few months. The Spring 2018 market will be a shocking reversal from the last rutting season. Demand will be squished not only by rising rates and tougher lending regulations but by negative market psychology. When people expect prices to be lower in four or eight weeks, they stop buying. Meanwhile listings – already beefy – will bloat.

Repeated will be a pattern most Canadians never understand: when prices rise sellers retreat, worried about buying into a rising market even when they could maximize profits. Demand outstrips supply and the bubble builds. When markets tank, sellers panic and rush to bail out, worried they won’t get a fair price. Supply overwhelms demand, forcing prices lower. Boom. Bust. We never learn.

Well, the prime rate at the corner bank is now almost 3.5%. Variable-rate mortgages just went up. So did the rate on your home-equity loan or unsecured line of credit. Ditto for business loans. To follow may be credit card rates and maybe, possibly, remotely, a little titch more on deposit returns.

Add this to the list of losers published here yesterday: all the moisters, newbies and B of Mom clients who rushed in November and December to buy real estate in order “to beat” the stress test requirements. Congratulations, kiddies! You just qualified to borrow a higher heap of debt to buy a home at a price which will be less in six months. It’s like wandering down Yonge Street or Robson leaving thousand-dollar bills in the empty coffee cup of every homeless dude outside each Starbucks – but without the social redemption. Or buying Bitcoin.

The other two big stories this week are equally impactful. Let’s hope you heeded the advice of a certain pathetic blog to shun the fabled cryptocurrency, but  maintain your equity exposure.

Bitcoin, as of martini time mid-Wednesday (it’s what we do on Bay Street), had officially shed 50% of its capitalization in a single month. Waffling at the $10,000 level, it was worth less than half the value a week before Chistmas, when billions flowed into the cryptohole, much of it borrowed on millions of hipster credit cards. Like every other speculative, herd-fuelled, vapid bubble which preceded it (tulips, dot-coms, bullion, bungalows), this was bound to wobble and crater.

But ‘digital currencies’ carry a special risk, which is the impossibility of success. As the Bank of Canada just proved again this week, CBs have an iron grip on money which is never, ever going to be broken. No alternative, non-state, unregulated, web-based Snapchatty cash will become mainstream currency. So BTC was a roulette game. Pure specking. The outcome never in question. Get out.

So if the coin’s in a bubble, then aren’t stocks doing the same? The Dow on Wednesday crashed through the 26,000 mark and has surged 5.5% in just two weeks. That’s on top of a 25% gain last year, and it’s all being called a ‘melt-up’. Which it is, probably with more to come. The drivers of the market include Trump’s yuge tax cut, romping corporate profitability and the renewed global growth which has goosed job creation, inflation and – yes – higher interest rates.

The difference between equities and Bitcoin is that stocks actually represent an ownership stake in companies making money. BTC, on the other hand,  is an investment in man buns. But, admittedly, both are propelled by emotion, greed and testosterone.

The obvious choice is stocks, but held in a broadly diversified ETF to reduce risk, and in balance with other assets (fixed income) to reduce volatility. When equities inevitably correct, the safe stuff becomes more valuable and you get to sleep at night. Which is more than can be said for cryptomaniacs or slanty-semi owners tonight.

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January 17th, 2018

Posted In: The Greater Fool

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