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October 5, 2018 | The Thankful One

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.

Stocks plopped a bit Friday after the latest jobs numbers. No wonder. This is big stuff.

In Canada a wave of part-timers surged the employment stats skyward. In the States, it was all about wages. They’re up almost 3%, racing past inflation, making people feel silly and richer. The jobless rate in America is 3.7% (everybody’s working who wants to), the lowest since I had a folk-rock group and wore Beatle boots and bangs.

So now the market’s worried about inflation. Rightly so. That means higher interest rates. Thus US bond yields are surging way past 3%. That spells competition. After all, why risk money buying stocks paying 3% or 4% which could lose capital value when you can get a risk-free government bond coughing out 3.2%?

The boffo American jobs performance seals the next rate hike in a few weeks. There will be three or four more in 2019 thanks to the Trump effect outlined here a day or two ago. Tax cuts, fewer regs, trade walls – all of this has thrown gas on the fire. The bond market can see that, and yields are racing higher because (as stated) it means inflation – which makes bonds worth less. (Remember that bond rates and bond prices are inversely correlated.)

Now some people have told you US rates are heading for an inverted yield curve, which sounds painful. They argue this normally signals a recession, which is why they’re out buying tinned tuna and going to cash. But that’s no longer the case, as blog dog (and Van-based financial analyst) Hans Knapp pointed out to me late Friday:

Sadly I have no dog picture to share with you, but after the recent upheaval in bond rates, including today, I decided to compare the US yield curve to where it was a month ago.    In an interesting retort to those who claim the yield curve is about to invert, you can see that the longer end of the curve moved up at the same amount as the short end.

The conclusion from this is that, for the first time this credit cycle, the market is beginning to price in the prospect of possibly higher rates over the long term.   If that comes to pass, it could have profound impacts on asset prices such as homes not just in the short term, but the longer term as well.

And here’s the proof – you can see that rates (short & long) are coursing higher. Yup, that clearly suggests markets expect this is the real deal. Higher rates as the new normal. The Fed will not stop until gobs of stimulus have been removed.

 

So last week there were more than 80 Canadian lenders which raised mortgage rates on various terms. More increases coming. The job numbers in Canada are good enough to ensure this happens, even though incomes here are lagging. Concurrently, inflation has shot up to 3%, the point at which the Bank of Canada starts drinking heavily. So, expect an increase on October 24th.

Meanwhile mortgage broker and analyst Rob McLister says anyone thinking of borrowing a mortgage needs to keep an eye on the Canada 5-year bond yield. “There’s a good chance the 5-year yield could approach 2.50% before too long. That would take 5-year fixed rates up another 15+ basis points, which would cost 5-fixed borrowers $1,780 more interest over their term on an average $250,000 mortgage.”

Well, check out the yield now. This is why mortgage rates will swell, then stay there.

 

“If you need a fixed-rate mortgage in the next 120 days,” says Mortgage Rob, echoing advice here of several days ago, “protect yourself and lock one down this week.”

Or, you could just listen to Andrew. His Thanksgiving lesson: life’s about flexibility and choices, not stuff and debt.

I am thankful for your blog. And I am thankful for being a renter.

My family does not have huge savings, nor do we have a high income. But, by shunning the debt that has become commonplace, we have been able to weather some storms that would have otherwise sunk us financially. I was able to close my first business, despite it not being successful, and still pocket some cash from it. I was able to quit a miserable job without another job to take its place. I was able to work truncated hours in order to go back to school part time.

None of this would have been possible if we would have taken on the debt of a large mortgage. I will happily pay someone else’s mortgage for the freedom we have from being debt free.  So, I’m thankful this Thanksgiving for being a renter.

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October 5th, 2018

Posted In: The Greater Fool

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