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April 24, 2019 | The Tide

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.

Yes, I know there are but 153,000 souls on that glorified sandbar called PEI. But suddenly it matters. The PMO’s freaking out again.

There was an election this week. One of consequence. The ruling Liberal party was essentially wiped out, going from government to third spot. The sitting Lib premier lost his own seat. Islanders put a bunch of untested Greenies into the official opposition. And the Tories surged up the middle to form government.

Hmm. This comes mere days after a leftist, Liberal-friendly NDP government in Alberta was smoked by Jason Kenney’s new-age barbarian conservatives. And last year, as you know, the Liberals were punted from power in the country’s most populous province as the brash, Trumpian Doug Ford ousted Kathleen Wynne. Meanwhile four provinces will be suing Ottawa over its carbon tax, and the SNC Lavalin mess is far from forgotten.

PEI matters because it was Lib-loving Maritimers who put Trudeau into 24 Sussex four years ago. Every single seat in Atlantic Canada went red, so when a sitting local Liberal government loses this badly, it tells you something’s on the wind. We’re less than six months from the next federal election… and the worst is yet to come.

The Bank of Canada weighed in Wednesday morning. The news seemed like no news – interest rates will stay exactly where they are – but financial markets quickly grasped the message. The Canadian dollar slumped. Bond yields dropped and prices swelled. The TSX paused its 2019 rally to shed most of 100 points.

The central bank has turned from hawk to dove. Three months ago it was projecting several rate increases this year. Now, none. After six months of crappy economic growth, the bankers have thrown in the towel, reduced their targets and say that (at best) the economy will grow by 1.2% this year. That’s less than the inflation rate, so it could be called an actual contraction.

The key government 5-year bond dropped below 1.5% again, and could test its 12-month low. That’s a stunning plop of a full 1% since last autumn. In the bond world, this is Stormy Daniels.

Says mortgage broker/bloggerRob McLister, who is telling people to borrow short: “Today’s news gives variable-rate borrowers comfort as the market believes the next BoC move will be a cut. And it’s rare for a central bank to cut rates and then reverse them higher soon after. Hence, if you believe the market, the odds are good that we’re entering a long pause in rates or (eventually) a new rate-cut cycle.”

Will the central bankers completely reverse themselves and drop the cost of money?

Meh, I doubt it. But anything is possible. If the current oil spike fades, if trade tensions continue (China just shafted our canola guys), if debt and fear stalk the housing market, if the job creation numbers fizzle, than a cut could happen by the autumn – just when Canadians are getting ready for the federal vote in October. And while slightly lower rates would be welcome, possibly saving the butt of terrified property sellers in Vancouver, they’d be fodder for Conservatives arguing that Justin Trudeau just blew an entire economic recovery.

In the space of four years, the Tories will allege, the Liberals turned a balanced budget into a string of deficits, added $100 billion to the debt, raised income taxes, gutted TFSA contributions, increased government spending, presided over a real estate bubble and managed to irritate not only our largest trading partner, but the Chinese as well. If the Bank of Canada is correct, the country could be borderline recessionary in another few months. That’s no disaster for investors, of course, but the last thing a sitting PM needs. Could a PEI happen in Ottawa?

We know the economy stalled out six months ago. The new NAFTA has yet to be ratified by the US, and may not be. Real estate activity has cooled dramatically with sales down 40% in Vancouver and prices 20% off their peak in the GTA. The carbon tax has turned into a hairy issue for the feds to manage, and is likely to dampen economic activity going forward.

History shows a governing party trailing in the polls six months before an election is usually defeated. Whether that happens in 2019 will be known soon. “The core message today is one of caution,” TD economists said of the central bank decision.

If you happen to hear the prime minister call his opponent a climate change denier or white power sympathizer well, you know he’s already lost.

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April 24th, 2019

Posted In: The Greater Fool

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