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April 26, 2018 | Going Alt

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 numbers are foggy, but it seems alt lenders are raking it in. Outfits like Toronto’s Firm Capital give out mortgages to anxious people at an average of about 8.5% – close to three times the cost of a home loan from one of the big banks.

Of course, you have to be desperate to pay that amount of coin. And most are – desperate to buy a house or refinance an expiring mortgage and unable to pass the B20 stress test. So, they go alt. The risk of default is big, therefore so is the rate. No mortgage insurance involved. No bank regulator, either. And business is booming.

The US central bank has raised rates five times in about a year. Our guys have pulled the trigger three times. The Bank of Canada took a pass this month, so now markets are giving 76% odds that the cost of money (including mortgages) will go up on July 11th. That will take the BoC rate to 1.5%, which is still less than inflation of 2.3%. So, rates are actually negative – something bank boss Stephen Poloz says will not continue to be the case for long, since we are now nine long years into a recovery.

Translation: the central bank wants a ‘neutral’ rate at least equal to, if not greater than, inflation. So there’s a 1% increase (four traditional hikes) in the pipeline over the next period of time. A year? Eighteen months?

Beats me. But markets are reacting now. Hikes in the bond market had stocks going in the other direction earlier this week as US Treasuries nailed the 3% mark for the first time in four years. The 10-year American issue has been flirting with that level for a few months, and every time it closes in, money streams out of equities and into safer havens. After all, if the government will pay you 3%, risk-free, to hold a bond then why risk capital losses to own shares with a dividend not much higher? Bonds at these levels start to compete with stocks. And stocks don’t like it.

The expectation now is Treasuries will finish the year at 3.25% or so, and that’ll mean three or four additional increases by the Fed. Next year, another three. In all, this cycle will have seen 12 to 16 jumps by the American central bank. If you think our guys are going to sit on their hands and watch without acting, you’re reading the wrong blog. Google “NDP Economics” instead.

Inaction would tank the value of the dollar and spike inflation. That night be okay for trade (so long as the Americans don’t complain about currency manipulation) but it gooses prices and drops consumer spending while encouraging wage demands (pesky employees). None of that does the central bank want. Nor will we get it.

Our bank has followed the Fed more than 90% of the time. With decent economic growth, robust job creation and romping corporate profitability, this time will not be different. The path ahead will be gradual, but it will be up and more up. The combination of slowly rising rates and steadily diminishing house equity will screw up people who thought the opposite would always prevail. Well, no more. That ship has sailed.

What does the Bank of Canada desire?

Simple. Low inflation – about 2%. A stable, range-bound currency around 80 cents. Steady economic growth of maybe two per cent. And it wants people to stop snorfling debt like crazed truffle pigs.

Those who have come here for years to say rates would never increase have been proven wrong. There’s more to come. No recession (except in BC). No rate cuts. No going back to 2% mortgages. Things may get so damn boring this bog will shudder to a halt, then reopen as an online, sub-prime lender. With a cat theme.

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April 26th, 2018

Posted In: The Greater Fool

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