June 4, 2019 | The Last Refuge

The Trumpian trade war continues to roil. There’s a new casualty. Interest rates.

Stock markets coursed higher Tuesday on word the boss of the Fed, America’s central bank, is open to lowering the cost of money as a defence against the damage the nation’s president is doing. In fact, the odds of a cut are raging higher. The market now gives a 56% chance the first chop will come at the end of next month, with 93% odds of a couple of nibbles by the end of the year.

Jerome Powell, Fed head, was the second central banker this week to yak about cuts. Traders took that news, along with statements by Mexican officials that those new tariffs might be avoided, as reason enough to go bargain hunting. So up went Wall Street.

Said Powell: “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 per cent objective.” In fact recent reports of slagging consumer spending have raised concern inflation is retreating as families face higher prices, thanks to the war with China. Meanwhile bond prices have jumped, bond yields shrunk and recession talk expanded. So all it took were a few words from Powell to hold back the tides.

Ironically, the president may get the rate cuts he’s been hounding the Fed about. Cheap money is crack cocaine to the economy, turning debt into consumption and more GDP. Now the White House can hammer on China, bully Mexico and encourage the UK to commit trade suicide, and still have a hopped-up nation. It’s Trumpenomics at work – just like a new attack on tech giants like Google while 19th Century coal companies are coddled. Go figure.

Anyway, it looks certain cheap money is returning. Australia threw in the towel and cut rates this week in the face of a property collapse and retreating economy. Canadian government bond yields, as shown here yesterday, have plunged by about two-thirds since the winter. Five-year mortgage rates are sub 3%. And a couple of days ago Tangerine (owned by Scotiabank) became the first major player to chop its HELOC rate to less than the prime rate. So all this should give you an indication of where things are going.

This is what happens when the two biggest economies in the world, each other’s largest trading partner, get into a spitting contest. Exports drop, domestic costs rise, multinational companies are whacked and five decades of trade liberalization is arrested. So just as globalization raised per-capital incomes across the world, so protectionism brings them back down. At the heart of this has been the dirty little issue of migration. It caused Brexit and the agony of the UK. It elected Trump. It threatens the EU. It’s at the centre of political wins from Brazil to France, Italy and Hungary. And it’s not going away.

‘Nationalism’ was a badge few politicians had the courage to wear since the last great war. But Trump has embraced it, revived its purpose and lacquered on a new coat of respectability. There are many economic and financial implications. The US can afford to be a nationalistic place, erecting walls and barriers, and still offer its citizens a prosperous life. Canada, not so much. With a big nation and a small pop, we need trade to sustain our standard of living. Mulroney saw that forty years ago when he pushed through a free trade agreement with the States. Decades earlier Lester Pearson signed the Auto Pact to secure investment and jobs, while trashing protectionism and walls.

So maybe it’s all changing now, or perhaps just a fad. Too early to tell if Trump’s a harbinger or an anachronism. In the UK it seems nationalism (Brexit) is the last refuge of grumpy old Boomers while younger generations crave the freedom, porous borders and unbridled openness of common markets. Not hard to see who will ultimately triumph. But between now and then, more turmoil, volatility and wild swings. Cutting interest rates just months after a string of nine increases tells you something. Nobody’s driving the bus.

Gulp.

$     $     $

Well, Mike wants some advice and has asked that the following be put out there for comment.

My father is thinking of leaving his freehold home in the next one to three years. He is turning 79 soon and he has a really large corner lot with a good amount of work associated with keeping up the property. My brother just purchased a concrete box in the east end where he works and he told me to maybe look into paying dads rent in a condo and taking over the house and letting him remain the owner.  I have also thought about just purchasing it free and clear.  The house is biking distance to my work (which I love) and is probably worth about $750,000.

I have about $225,000 doing really well this year and I pay about 1000 per month splitting rent with a roommate. I’m just wondering if your blog readers have done or considered this sort of thing and if there are any advantages or disadvantages of how to negotiate this sort of takeover.

The rabble will chime in shortly, Mike, but the first piece of advice is to ignore your brother, who’s obviously thinking about his own inheritance potential. So, just buy it with a small down and a juicy, cheap mortgage. Give your dad the whack of money, get it properly invested and it should throw off about four grand a month. That rents him a great place, buys food and cigars for life and still leaves the principal intact. Get an appraisal. Use a lawyer, of course. Hire your old man an advisor. And never write into a free blog for advice.

Garth Turner June 4th, 2019

Posted In: The Greater Fool

Next: Repeating Behaviors in Real Estate Boom/Bust Cycles »