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March 18, 2021 | Inflation

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.

It doesn’t stop.

One lonely 2×4 at Home Depot this week costs fourteen bucks, with HST. A sheet of plywood, three-quarter inch pine is (gulp) $77. Even lowly spruce is close to sixty bucks. My suspender-snapping fancy portfolio manager buddy Ryan says his basement reno bill went up a little because of material inflation – 53% more.

Today we got new house price stats. Up 2% in February, month/month. That’s 24% annually. It was double that in Vancouver. In 27 markets, prices roared ahead in 22 of them. As we showed here yesterday, resale house prices are now (says a big bank) ‘parabolic’ with prices moving as much every four weeks as we used to average each year.

Now, factor in the GreaterFool Puppy Index (goldens four grand, chows five, frenchies six), plus the sold-out nature of boats, RVs, Pelotons, quads and cottages, and you know Stats Canada’s latest tally of inflation – 1.1% – is, well, psycho. Let’s just hope the feds are incompetent instead of evil. Here in the real world the cost of living is out of control.

The bond market’s been smelling this for some time. So while central banks say everything’s under control, the recovery is unfolding, inflation expectations are reasonable and benchmark rates will stay on hold for a couple of years, look what bond yields have been doing…

In response bond prices fell further and tech stocks took a hit (those companies thrive on cheap debt). In the States, 10-year Treasuries went through 1.75% for the first time in a year after the Fed indicated there’s not enough inflation yet for its liking and the economy will be allowed to run hot, with lending rates staying suppressed.

Sane folks can see what’s exploding around us. The real estate/building materials/reno explosion is but one aspect of this phenom. Look at Ottawa, where our enlightened leaders just spent $400 billion we don’t have fighting the virus. In fact more than half that money was sent directly to people, who then plunked at least $100 billion into their bank accounts. The historic jump in personal savings is proof extreme stimulus was probably unneeded. But it was spent anyway. It added to the debt. It was newly-created cash. It devalues the money already existing. And that’s why my colleague’s basement is now sheathed in priceless drywall.

CBs and governments have clearly made the decision to risk steadily-rising prices rather than let the economy take a further Covid hit. They’ll keep benchmark rates low so cheap loans continue to flow. They will not stop buying bonds in an effort to suppress yields. Meanwhile politicians in Canada keep huge cities (like Toronto) locked down, allow the hardening of provincial borders, seriously hobble the entire retail sector and eviscerate the tourism and travel businesses.

As a result, we have stimulus billions and no place to spend it all, other than on booze and dogs (not so bad). There are also five million Canadians still doing the WFH thing, cutting daily overhead and adding to savings. The result is a big and growing pile of cash to be unleashed as the economy reopens. When all the stores, gyms, hair salons, arenas, clubs, bars and stadia get back on line, with the planes flying, the borders porous and workplaces repopulated, you can imagine the result.

Some worry central bankers could lose control. If the crazy costs of everything – especially accommodation – surge more it could lead to sizeable compensation demands and a wage-price spiral that would have CBs jumping on the brakes. Then rates would rise fast.

But for now, this is the reality:

  • Bond yields are driving mortgages up. Five-year terms that were 1.5% are now over 2%, and climbing. That 2.5% 10-year mortgage has jumped a full 1%. More to come.
  • Variable rates have been dropped by major lenders to keep loans volumes flowing. VRMs that were on par with five-year rates are now about 70 points less.
  • The March and April housing markets will be obscene. Rising rates guarantee that as the fence-sitters dive in.
  • Bonds and ETFs based on them will continue to lose capital value, which is why half the fixed-income in your portfolio should be in preferreds (they gain as rates increase and pay a dividend as well).
  • Stocks do okay in inflationary times since, in general, higher rates signal more economic growth and enhanced profits. As the vaccines defeat the virus, that’s exactly what you should expect. But be wary of the tech guys, or other leverage-sucking outfits. The more inflation there is in the world, the more you need growth.
  • GIC returns may eventually increase, but these are still brain-dead assets. You are better to buy a van full of OSB and sell it to guys like Ryan.
  • And remember that if inflation stays with us for a long time (it will) hat non-taxed, registered accounts become even more crucial to your financial future. Stuff that TFSA. Make max RRSP contribution. Get free money with your kids’ RESPs.
  • Buy a house? Sure. If you need one and can afford it without gutting your family’s finances. Just do it in a reasonable market. Like Wabush.

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March 18th, 2021

Posted In: The Greater Fool

2 Comments

  • Avery Roberts says:

    “We live in a fantasy world – the great task of life is to find reality.” – philosopher Iris Murdoch.

    There is no inflation. It is an illusion. Things are not more expensive. It doesn’t take any more energy, labour and materials to produce an apple today than it did 100 years ago. Possibly even less. The reality is currency devaluation. In my lifetime I have seen the purchasing power of a dollar go from 1 dollar to 2 cents. Sure, if there’s a drought in Mexico the price of green peppers will go up. But that’s a supply and demand thing. And often temporary. But a continual and constant erosion of the purchasing power of a dollar for the last 50 years or more is nothing more than the “printing” of thin air money (to inflate means to fill with air) than there are goods and services to back it.

  • Avery Roberts says:

    An additional clarification. The popular press often incorrectly uses the term “inflation” to mean a “price increase” creating a confusion that the two terms are one and the same thing. A “price increase” is correctly a supply and demand thing often created, by mother nature and/or abnormal human activities such as war. Whereas “inflation” is a process by which a government and/or a financial entity devaluates a currency.

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