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October 29, 2018 | Going, going…

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.

Is it over? Finally?

Quietly last Friday our central bank released stats showing a dramatic, almost historic, drop in family borrowing. It’s plunged by more than half in the last few years, and tumbled topsy-turvy in the last 12 months. In fact, we’ve cut our borrowing level back to what it was in 1983.

The bankers and the mortgage brokers know this. That’s why they were lobbying their pants off in Ottawa a couple of weeks ago, trying to gut the universal house-buying stress test. They failed. Since then interest rates have popped again, and the stress test bar will likely be rising again.

So, when the annual growth in debt falls from plus-8% into the 3% range, isn’t this good?

You bet. The steaming pile of debt – now at more than $2.1 trillion (two-thirds is mortgages) grows a little more slowly. That pile, by the way, is larger than the entire Canadian economy, and explains why 75% of all properties in Vancouver are now assessed at over $1 million. The damage our debt-appetite has wrought is epic.

But here’s the thing. Real estate – which secures most of this debt – is now retreating. At the same time interest rates are rising. Tighter lending regs means credit growth is withering. So a new report this week from Morgan Stanley lumps us in with Australia as “facing a critical juncture as housing markets weaken, forcing a reappraisal of leverage and wealth, as global financial conditions tighten, increasing the consumption drag from debt service and rising savings.”

Huh? This means rates are going up across the planet (as global growth creeps forward, inflation returns and protectionism spreads), causing people to borrow less while rising debt costs eat into their spending. There’s more to come, as the Bank of Canada told us. The current central bank rate of 1.75% will be rising at least a full 1% before it reaches ‘neutral.’Thus, a bank prime of about 5% and a stress test over 6%. Given that, there’s no way places like Vancouver will escape a market correction. Yeah, probably a big one, given the Dipper tax assault now taking place.

Now, speaking of Australia, we could be importing more than homeowner misery from them.

In a recent post we brought you the breaking news that blind housing auctions will soon come to an end. No more submitting an offer in a multiple-bid situation and having no idea what you actually need to pay. The real estate regulator in Ontario is revamping the act covering the industry, giving full disclosure to all parties. An open auction, in other words. Just like Down Under – where they’ve also done a fine job at screwing up the property market. But at least it’s all beentransparent.

To date, auctions are rare in Canada and have only happened with bow-wow listings that failed to sell through traditional MLS exposure. But open auctions are inherently fairer than forcing buyers to guess what price they should offer in competing against unknown parties – while being equally blinded to other important details, such as conditions and closing dates. In order to ‘win’ people are encouraged to inflate bids and strip them of important protections. At the end of the process, unsuccessful bidders walk away without knowing exactly why they lost while the triumphant one always wonders if she overpaid. The system sucks.

Of course, if you’ve ever been to a country auction of furniture or tractors, or a fine art auction selling valuable works, you know what can happen. Bidding fever, competition, testo and adrenalin can cause prices to pop. But it all happens in the light of day, in real time. So when your spouse starts breaking your ribs with her elbow, you know it’s time to stop.

 

On Monday afternoon, Bloomberg reported this:

White House officials are largely resigned to losing Republican control of the US House and are bracing for an exodus of staff worried about a torrent of subpoenas from Democratic congressional investigators.

President Donald Trump’s team still sees a possible path to victory. But talk of a “red wave” has ceased, advisers inside and outside the White House said. Trump last uttered the boast in public in August. The mood around the president has darkened as many challengers continue to out-raise seasoned Republican incumbents and Democratic enthusiasm surpasses that of the GOP.

Yes, next Tuesday will be a biggie. It’s the first comprehensive referendum on the Trump presidency in a nation deeply polarized. Recent events (Supreme Court, pipe bombs) have only increased the fissure. Left against right, con vs lib, nationalists against free marketers – American politics have gone toxic. And because Trump is the poster boy for populism around the world, what happens next week has implications from Brexit to the creep Brazil just elected.

Markets will be watching this intensely, as you might imagine. Trump poured gas on equities with a big tax cut, laxer regulations and protectionist tariffs. But he’s scared markets with his one-man trade war, worsening relations with China and now a runaway budget deficit. (It happened again Monday – stocks sold off on word Trump will impose duties on remaining Chinese goods).

Will a Democratic win on the 6th cheer investors? Or might it pave the way towards reversal of the tax cut and maybe even impeachment – killing off what’s left of the Trump Bump? Is a red wave in the midterms a signal to the world the America is great again, and ignite more gains? Or will investors just be happy it’s over, whatever the result, making October look like it was a big buying opp?

Without a doubt, this is a Trump moment. And there will be a market reaction.

My suspender-snapping fancy portfolio manager buddies Doug Rowat & Ryan Lewenza will be joining me for a private conference call to analyze all this tomorrow night. That call will be available Wednesday morning here. Whatever happens, don’t blame us.

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October 29th, 2018

Posted In: The Greater Fool

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