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May 30, 2018 | The Warning

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.

Interest rates will be rising in six weeks – the fourth increase in about a year. The cost of money will rise again after that, likely on October 24th. Don’t say you weren’t warned in advance.

The prime rate will be 3.95% by Christmas. The benchmark qualifying rate for the mortgage stress test will be 5.84%, and HELOC owners will get a letter telling them the cost of their demand loans will be upping to almost 6%. This isn’t idle conjecture, and here’s why…

The Bank of Canada poodles understand they cannot get too out of step with the US Fed, which is full of snappy pitbulls keen to reverse nine years of accommodative money policy and reign in an economy thumping along on Trumpian testosterone. American rates have increased five times in about a year with two more to come in 2018. Without keeping pace, our dollar is whacked, stoking prices and inflation.

Speaking of rising prices, the poodles said this on Wednesday: “Overall, developments since April further reinforce the governing council’s view that higher interest rates will be warranted to keep inflation near target.” The target is 2%, and we’re already over that – with decent economic growth, the best job creation in years, outtacontrol gas prices and a booming American economy. The enemy of central banks for years was deflation. Now it’s all different.

Then there’s real estate. It’s cooling, of course, with a collapse in new house sales and a serious decrease in transactions in major markets. But what the central bank cares about is persistently high prices (inflationary) and mounting household debt. Because Canadians lost their minds and decided to buy what they couldn’t afford by financing it, high house prices and tighter mortgage regs have failed. Debt ratios are still epic. The only real brake will be the cost of borrowing, So, up she goes.

And how about T2? The dude pulled a Pierre this week and bought a pipeline company. The $4.5 billion earmarked for the Kinder Morgan deal – to be organized by a new Crown corporation full of civil servants with DB pensions – is just a start. The final cost could be two or three times that and you can be sure the CPP Investment Board will be strong-armed into ponying up a pile of cash. Good thing all the moisters today are financially self-sufficient and won’t need pensions.

The pipeline deal is inflationary, of course. Billions will have to be financed, then poured into a construction project creating 15,000 construction jobs and 37,000 direct and indirect jobs per year of operation. That’s all great and good, but it’s the kind of massive activity central bankers focus on. Mega-projects – especially ones sucking on the government teat – have consequences.

So there’s this cocktail of factors the bank is convinced will emerge. Sustained strong US growth, thanks in part to the Trump tax cuts. Higher oil prices as the global economic expansion continues (growth has gone from 0% to about 4%). Improving Canadian exports. The best wages in six years (up 3.6%). Ontario’s march to a $15 minimum wage, jacking the price of retail goods and restaurant meals. BC’s massive increase in real estate-related taxes – soon (maybe) to be repeated by the Dippers in the East. And the creation of 378,000 new full-time jobs in the past 12 months. The bank also says that, despite higher mortgage costs, it expects the residential real estate market to rebound.

Whether all this happens or not as expected is moot. The central bank has stated clearly this week that rates will be higher on the afternoon of July 11th and more will follow.

The main reason, then?

Simple. To stop the borrowing. If it continues, we’re pooched, if a state of poochiness has not already been achieved. The increase in household debt needs to be choked off. And I’m betting it will.

To those who have said the cost of money cannot rise because nobody could afford it, you’re wrong. With the mortgage stress test at close to 6% this year, it’s clear that’s not what the poodles fear most.

Canadians have proven they can’t handle credit when it’s cheap and plentiful. God help us when the same happens to weed.

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May 30th, 2018

Posted In: The Greater Fool

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