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December 20, 2018 | Coming Clean

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.

Trump couldn’t do it. Even Mr. Market failed this time. Nothing could stop the US central bank, aka The Fed, from upping its key rate yet again.

It was only a quarter point, but Wall Street had laid some heavy odds that Fed bosses would look at the ongoing correction, listen to the US president hammering them, and take a pass this time. They did not. So stocks have reacted this week in a total funk. Bond prices have increased as money flows into fixed assets, lifting bond ETFs with them.

The Fed ignored what other people fret over. The US-China feud, Meng and the Michaels. Macron being toasted in France. Brexit turning into Brokeit. Slower global growth. Mueller, Cohen, Manafort, Flynn and all the little Trumps. Oil worth less than half what it was five years ago.

The central bankers just don’t care. Instead they’re fixated on the return of inflation, wage-price pressures, robust economic growth, full employment and the escalating impact of tariffs. So, up she went. But at the same time, it’s becoming clearer the bankers – our guys included – are closer to the end of this tightening cycle.

Whazzit mean?

First, Mr. Market has to get over being wrong. It was a dumb call to think the Fed would stand pat this week, but lots of people made it. So the sell-off will continue for a little while until stocks are too cheap to pass up. If the current correction worries you, stop looking. Like every other one which went before, it’ll pass. You only punt money when you sell, turning a paper loss into a real one. The advice stands: so don’t.

Second, rates may be going up in the US, but look what just happened to Canadian government bonds. Wow.

Canadian bond yields plop. Bond ETFs swell.


The yield on benchmark 5-year government debt has crashed to the lowest point in almost a year, indicating we little beavs have some serious stuff to deal with. For example, our #1 export is oil, and world prices have been crushed lately. Besides, we still have that pipeline problem and a paralyzed federal government. It even has the cowboys takin’ up secession again. (By the way, BC just lost the $25 billion LNG thing.)

Then inflation. It’s dropped back below 2%, thanks in part to cheap gas, but also reflecting lousy wage gains. Family incomes are stuck but debt keeps rising. And here’s a stat to stiffen your knickers – of all the net worth in Canada (now over $11 trillion), 76% is in one asset class. Guess what that is?

The national fixation and dependence upon real estate is scary. We’re now where the Americans sat just before their housing market blew up and folded that country (and us) into recession. Over the past decade Americans have been reducing the share of their economy based on property, just as we have been accelerating ours. So, no coincidence that family debt here has swollen, while to the south it’s shrunk.

The means we have more risk. A sudden, sharp or sustained plop in house prices here could lead to a loss of consumer confidence and spending as the ‘wealth effect’ of real estate blows up. It’s exactly what this blog’s been warning about since you still had hair – a one-asset financial strategy never works for long. Not for a nation. Not for you.

Well, an upside for homeowners is an end to mortgage rate increases, at least for a while. The banks may even drop fivers a little – 10 or 20 basis points – but they’d rather not. We’ll see. The new mortgages has plunged in volume over the past year (since the stress test), and spreads are thin. Bankers are not happy.

Whatever rates do, the sentiment in the real estate marketplace is negative at the moment. Sales are down. Owners have lost equity this year – just like most financial investors. The unwind that central bankers started 8 months ago, trying to stem the tide of money they created after the credit crisis, is having an impact. Stocks hate it. Realtors loathe it. Audi salesguys are in a funk. Mortgage brokers are comatose. The president’s having a cow.

Withdrawing stimulus is as much fun as it sounds. So have some eggnog. Actually, a lot of eggnog. We’re not done yet.

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December 20th, 2018

Posted In: The Greater Fool

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