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June 28, 2019 | The Head Fake

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.

Recall that advice to lock in your ultra-cheapo mortgage? And to use the bank’s dough instead  of your own when buying real estate?

Well, more evidence this makes sense. If you’ve been waiting for the central bank to punt the cost of money, it could be a long stretch. It won’t be happening in July. Or perhaps the rest of the year. Just in time for the October federal election, guess what? The economy’s revived. What a coincidence.

First came the inflation news. Wow. It’s 2.4%. So if your HISA or GIC isn’t pumping out a lot more than that (to compensate for the stiff tax on interest), you’re losing. Fortunately balanced portfolios have been steamy lately – up about 9% so far in 2019. This also means locking into a five-year mortgage at 2.5% or close to it is a brilliant move. Free cash, baby. What are those lenders thinking?

It’s a war. Mortgage originations are w-a-y down thanks to a plop in sales, the moister stress test, turgid incomes and prices which stuck in the red zone. Banks and brokers need to move money. Home loans at insane levels are the response. If you need money, well, come and get it.

Sadly many people have bought into the meme that rates will continue to push lower. New data shows this is unlikely. In fact, the next Bank of Canada move could actually be higher.

Core inflation is surging and central bankers know if they heap more stimulus on the economy (via cheaper rates) the cost of living will continue to rise. That’s a negative, since a key mandate of the bank is to maintain price (and currency) stability.

Second, the economy is rebounding. Just the way BoC boss Poloz told us it would. Despite the Chinese, Trump’s trade wars, Comrade Horgan, hapless Ontariowe and all the pissy peoplekind in Alberta. The April numbers came out Friday. Yuge. Annualized growth north of 3%, and that comes on the heels of a strong March – in fact the two-month swell is the greatest since the end of 2017 (before real estate laid an egg). The oilsands are humming again, thanks to the NDP’s production cuts (sorry, Jason), however car sales have slumped. Overall, a bright picture.

Inflation, jobs, growth all up. Why should rates fall?


So is the Ploz right? The unemployment rate has dropped to 5.4%, which is the lowest since 1976 when people had big hair and sequined bellbottoms (still have mine). The new NAFTA is sealed. Commodity prices have surged. The dollar, too. So with rising employment, higher inflation, a strong currency and robust GDP, why would rates drop?

Truth be told, the central bank doesn’t want to lower the cost of money. If the latest economic numbers are correct (there’s already some dispute over that), it now has justification to sit on its hands for months on end, then surprise us with a bump.

As for the States, Mr. Market has priced in three Fed chops in 2019, but there all that could change on a dime if Trump (a) woos Xi or (b) nukes Iran. Place your bets on either.

The only clear messages are this: (1) when you can borrow money at the inflation rate why use your own? (2) Don’t dawdle.

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Hmmmm. What if investors have played this all wrong, and rates do rise in the next few months? What if Trump pulls it off, oil pops on renewed global growth prospects, trade tensions ease and markets melt up?

Then you’ll sure be happy if you ignored the wailing and moaning in this blog’s steerage section and loaded up on unloved, abandoned, besmirched and cheap assets like preferred shares. Prefs are hybrids of stocks and bonds, have less volatility than common stocks with fixed dividends generally higher than equities (ETFs currently pay 4.75%) and deliver the dividend tax credit. The market’s dominated by rate reset prefs, which gain in value as interest rates rise, and lose capital value (but pay a higher yield) when they fall. Lately preferreds have been on the outs as prices slumped. But this is why they now look so tasty.

Investors, coaxed into believing rates will fall further and a recession occur, have priced prefs to reflect this. But increasingly that looks like an extreme view. Growth, inflation, employment and commodities are all up. Trade tensions can vanish in a single political embrace. Central bankers have a great reluctance to cut, knowing the distortion that brings. Besides, stocks are expensive and bonds have recently jumped. In contrast, high-yielding, blue chip-quality preferreds are (like me) cheap and attractive.

Or, you can buy something that’s already gone up. Everybody else is.

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June 28th, 2019

Posted In: The Greater Fool

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