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October 1, 2018 | Tough

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.

Thirty years ago I packed up my laptop computer (it weighed about 20 pounds) my Canada-US Free Trade Agreement draft text (300 pages) and Dorothy, and headed to a swishy lakeside resort. “This is work,” I said to her, gravely. “It will not be pleasant to be with me. So we might as well be in a nice place. Take some magazines.”

Three days later, it was over. The entire FTA had been reduced to a folksy 8-page brochure called “A Citizen’s Guide to Free Trade.” As a newly-minted Progressive Conservative candidate, I brashly sent a copy off to the prime minister, Brian Mulroney, who was getting his ass handed to him by the Liberal contender, John Turner (not my dad). “This is the fight of my life,” the Grit had said during leadership debates, and his party was making huge gains running TV ads showing the evil Cons erasing the Canada-US border.

So Mulroney, to my shock, ordered the party to print about a million of these guides, which went to PC candidates across the land to hand out. Good thing, since the anti-free-traders were telling people the deal would mean Canada must sell its water, trash the dairy industry, open the cultural floodgates, let US multinationals dominate our economy and totally lose national sovereignty.

The Cons are traitors, said the Libs. Without a trade agreement we’ll be squished, Mulroney replied. What are you afraid of?

 

So the Tories won (me too) and we’ve had free trade with the States for three decades. FTA became NAFTA, and now it’s the USMCA. And only recently has Dorothy started to forgive me.

What’s in this new deal? Nothing much to get fussed about, it seems. Tweaks, adjustments, a bunch of angry farmers and lots of relieved car guys. The main news is that the agony of negotiations is over and a whole lot of economic uncertainty has lifted. Any deal, as far as markets are concerned, is better than no deal. So the border stays open, auto tariffs won’t happen and Trumpian protectionism is stuffed back in the bottle for now.

More importantly – unless you have cows – is what the USMCA means to your finances and investments. It turns out (as usual) that this is a mixed blessing.

For example, the forex guys liked the deal and pushed the Canadian dollar ahead smartly when it was announced. Now back over 78 cents US, this also reflects the new LNG deal going ahead for the crazy left coast of the country. For the equity markets, trade deals are as good as trade wars are bad. So while Bay Street advanced a little after the agreement was hatched, the Dow took off – swelling by more than 200 points. Why? It’s a big political win for Trump. First he pissed off the entire world, played the bully and threatened economic chaos. Now he’s making deals. And even if they’re mediocre, same-as-before agreements, he takes a victory lap and everyone’s relieved. One more to go – China – and the market reaction could be sharp, indeed. Invest the money. Stay invested.

The big news out of this deal will be Canadian interest rates. Given what happened Sunday night, the odds of another jump in the cost of money on October 24th are running around 100%. “The deal paves the way for a rate hike by the Bank of Canada this month, and a follow-up move that we now see coming in January,” says CIBC’s chief economist. Meanwhile Doug Porter at BeeMo adds that USMCA “is a major relief for Canada, lifting a heavy cloud of uncertainty from the outlook… Suffice it to say that this deal, along with last week’s solid run of data, all but cements a rate hike at the next policy announcement on Oct. 24, barring something truly shocking over the next three weeks. While rate hikes will likely stay gradual, the pace may pick up slightly more than previously expected over the coming year.”

In fact the bank now sees four hikes ahead: this month, January, April and July. Mortgages will be about 1% more expensive, and the stress test will float around 6.5%. For a residential real estate market that’s already slow, uncertain and suffering a sales slump, the writing’s on the wall. The new trade deal does not destroy a lot of jobs (just a few unemployed cattle), but it also doesn’t yield anything we did not already have.

By the way, on election day in 1988 the five-year mortgage rate was 12%.

So shut up and be happy this is now.

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October 1st, 2018

Posted In: The Greater Fool

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