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March 22, 2019 | The Inverted

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.

If you’ve been waiting to invest in a GIC that pays 5%, sorry. Not gonna happen. Conversely, if you need a cheapo mortgage to justify your house lust, you’re in luck. It’s coming.

After this week’s big reversal in tone by the US Fed, markets and investors decided to throw in the towel. Several decisions were made, and actions taken. You should know. This may set the stage for the next couple of years. Maybe longer. Some doomers say, like, forever.

First, it’s now assumed interest rates have topped. Just 90 days ago the Fed (and our central bank) was indicating two rate hikes at least in 2019. Now Mr. Market says that’ll be zero. This tightening cycle has suddenly gone pffft.

Second, bond yields crashed as the bankers went dovish. Bond prices spiked. Bond ETFs went along for the ride.

Third, this was pushed by a big wave of bond-buying. In the US that drove the 10-year yield down further, to the lowest point of the year. In Canada the benchmark 5-year Canada bond – flirting with 2.5% in November – finished the week below 1.5%. Incredible. That’s a dive in yield of more than 40% in a matter of months, pushing prices up. So you took the advice here to hold bonds in your balanced portfolio, right? Good.

Fourth, the rush to buy long-term bonds came because Mr. Market now expects central banks to be lowering rates in the future. Not the immediate future, but within the next couple of years. In fact this clamour caused the yield on those longer maturities to fall below what short-term debt pays. This is called a yield curve inversion, and please don’t try it at home.

Many people think it’s harbinger of recession. Sometimes is. Sometimes isn’t. But the consensus is that the US economy (and that of the globe) will be slower going forward and ultimately central banks will try to goose it back up with cheaper money. Right now markets are suggesting such a rate cut could happen about the end of 2020. In other words, the American economy might be headed for earth just as voters are making a decision on Trump’s second term. Interesting timing, n’est-ce pas?

Is the potential of a recession bad news for stocks? After all, the Dow shed 400 points on Friday. More to come?

Beats me. Short-term moves, as this pathetic, hectoring blog has pointed out over and again, mean diddly. Ignore them. In fact, lower rates are designed to stimulate things by encouraging people to borrow, spend and gorge themselves on dollops of new debt. More consumer spending fuels corporate profits and economic activity. Cheap money also makes stocks more attractive. Why not hold equities with a 4% or 5% dividend rather than a bond paying squat?

For example, Canadian bonds now offer less than cash. The central bank’s own benchmark rate of 1.75 – basically the risk-free value of money – is about the same as the yield on a government bond not maturing until 2033. There is no risk but, after inflation, also no return.

Heading down with bond yields, therefore, will be GIC rates plus the return on high-interest savings accounts, along with every other savings instrument at the bank. Bummer. And just as the spring real estate market launches, there should be mortgage deals all over the place. Already we’ve told you about HSBC’s 2.99% fiver and the insane 1.98% two-year loan available from the knuckleheads at Meridian CU. Shortly the Big Banks will weigh in with their specials – made more appealing now that government bonds are sinking along with its polling.

So let’s repeat yesterday’s lesson about investing in a world full of barbarians, strange family members and weird emotions. Own different asset classes in the correct weightings and ignore the news. Yes, stocks went down on Friday, but bonds went up. Next week might bring the opposite. None of this is within your control. And your dog still loves you. Even inverted.

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March 22nd, 2019

Posted In: The Greater Fool

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