November 22, 2018 | The S-Word

For months Trump’s been raggin’ on the Fed. Jacking interest rates relentlessly, he says, is ‘insane’. And last week Feb boss Powell fudged a little, suggesting if The Data looks weaker in ’19, central bankers might tap the brakes.

Hmm. How about Canada? Only a few weeks ago our guy was sounding all hawkish when he upped the bank rate yet again, sending the prime to almost 4%, and broadly hinting two to four more hikes were in the cards.

Since then a new spat of volatility has hit stock markets. World oil prices dumped. The money our Canadian guys receive for their product (thanks in part of clogged pipelines) dropped to an all-time low. The US escalated trade tensions with China. In the UK, Brexit caused yet another crisis and might fell the feisty PM. Italy’s a populist mess. Merkel’s on the way out. US voters seem more polarized than ever after the midterms. And now the debt market is scaling back a little both in America and Canada as yields fall.

In short, central bankers have new data to deal with. So the questions are simple: if we’re in the later stages of the business cycle (contraction-expansion-contraction-expansion) have banks upped rates too much? Or just enough? Or still too little? Is the economy so strong, with growing GDP and jobs, that stimulus should be removed? Or are things slowing and higher rates will hasten a recession?

Let’s ask two who know.

First, Mr. Bond Market. Yields on US 10-year Treasuries are fading back towards 3%. The Government of Canada 5-year bond has retreated from 2.5%. A leading indicator for fixed-rate mortgages in Canada has declined to where it was six months ago. The big banks edged the cost of home loans up since the central bank moved, but are now under competitive pressure to back them down. Meanwhile the mortgage market has withered seriously since the stress test sheriff came to town and shot all the moisters.

Bond yields have dropped as markets anticipate less growth and inflation. And if that’s truly where we’re headed then two to five more rate increases might be overkill. (And, OMG, Trump would be right.) Yup the bankers want rates higher than they are now, but the pace can slow. Besides, if the economy starts circling the drain, rates need to be elevated enough so they can drop. (Seriously.)

Second, Mr. Socks.

Remember in a recent post I told you about the only two kinds of stimulus that really matter – monetary and fiscal (neither involve latex). So while the central bank is taking its away, the feds are busy adding fiscal whoopee. In fact what we saw this week is more Trumpian than Trudeauesque. Less than a year after waging war on business owners, entrepreneurs and corps, the federal Libs have decided to let the deficit go to hell and spend $14 billion on corporate tax breaks.

This is pure stimulus. Manufacturers buying new equipment will be able to write it off their corporate taxes immediately – often wiping them out entirely. Other types of business can triple their existing write-offs in the first year that assets are purchased. Regulations will be overhauled and chopped. It’s a Canadian reaction to Washington’s lowering of the corporate tax rate and similar measures allowing companies to avoid tax altogether if they invest in growth. As a consequence, the federal deficit will swell to almost $19 billion and your toddler will be getting his first tat by the time the budget is balanced.

Combine this with a rebound in oil prices (if it comes) and you will be so happy that you overweighted Canadian equities when they were, like me, cheap and unloved. You did that, right?

Some of the acutely deplorable members of this blog’s steerage section routinely blame immigration for everything from expensive houses to clogged roads and a lack of  doctors. Figures. This is the age of nationalists, tribalism and intolerance. After all, when the US president calls ragtag economic refugees ‘invaders’ and sends in combat troops with the authority to use ‘lethal force’ it’s not surprising intolerance goes mainstream.

But let’s look at the opposite for a minute. Without immigrants Canada’s population would age and decrease over time. Just a statistical fact. Like climate change. Actually we have a great example of an advanced industrialized nation which has maintained closed borders and is now paying the price.

Just over 127 million people live in Japan where the population shrinks annually. It will be 97 million by 2050. Almost a third are over 65, and in huge numbers these folks are abandoning houses – just walking away from the burden. The overall impact on real estate values, as you might imagine, is depressing.

The Japanese word for ‘abandoned houses’ is akiya, and it’s getting wide usage. There are about nine million empty dwellings – 14% of the entire housing stock of the nation. By 2033 this is expected to swell to 20%. Lots of them are also free for the taking, or available dirt cheap to anyone willing to take over the costs of ownership. As a CNBC article pointed out this week, you can get a fixer-upper for about $4,000 US, or a really nice place for $177,000US.

But before you book a flight, remember how the Japanese feel about immigrants or refugees. Not generous. In fact last year almost 19,628 people sought asylum and 19,608 of them were rejected. Meanwhile Japan has been plagued by deflation, has the highest public debt ratio in the developed world and, as mentioned, more deaths than births.

But, hey, houses are free.

Be careful what you wish for.

Garth Turner November 22nd, 2018

Posted In: The Greater Fool

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