# Anyone Watching Interest Rates



## OptsyEagle

Perhaps a little early to sound an alarm bell but 6 months ago the 10 year Cdn Government bond yielded 0.56% and today it is around 1.32%. US rates have risen in a similar fashion.

As we know, interest rate movements will eventually affect the stock market but probably worse, the housing market, which can derail banking and of course no stock market can hold up during a banking crisis.

Not trying to be a buzzkill but it is kind of interesting. I think we have a central bank talking about low interest rates for a few years and here we have more then a double in rates in 6 months. Does this foresee inflation? We all know this money printing has to create it someday. Right now my opinion is that productivity improvements have offset the effects of money printing to subdue inflation, but I doubt we can keep up this productivity gains forever.

Any thoughts?


----------



## doctrine

I am watching them. Seems like forecasts vary from end of 2023 to early 2024 for the first hikes. If this is communicated in advance then you would think we will start hearing talk by the end of this year. Stocks are already moving to reflect this new reality - utilities and consumer staples are moving towards 52 week lows actually, in a bull market. Very interesting. The US 10 year breaking 1.5% would be big news. I unloaded my utilities and have no consumer staples but if they keep hitting 52 week lows then I may become interested.


----------



## sags

The Fed can't raise interest rates or the economy will collapse, so they will buy the debt.


----------



## OptsyEagle

The big problem I worry about, but of course do nothing in response to, is this. Someday all this money printing/deficit spending will result in inflation. Tough to determine when because I believe it will happen when productivity gains start to slow down. WHEN it happens, interest rates will rise and the fed will not be able to do too much about it. Rates will derail housing, which will derail banks.

So far, anything that derails banks tends to result in the government coming in like a white knight and bailing them out. But, what does the government have to bail them out with? Deficit borrowing? Now wasn't that what caused this problem in the first place. Can a problem causer be used to solve the problem, using the same stuff (money printing by fed/deficit spending by government) that caused the problem in the 1st place? I doubt it.

All this debt will one day require a reckoning. Hopefully it is a generation after mine that gets to deal with it but that might be wishful thinking on my part. Last years deficit was mind numbing. I just hope we don't need to go there anytime during my lifetime.

PS: I did notice that GIC rates have ticked up a little. Nice to see for a change.


----------



## Argonaut

Inflation has already happened from all of this debt/money printing. You can see it in the inflation of asset prices -- stocks, real estate, etc. And you have little speculative bubbles here and there in SPACs, cryptocurrency, and so on.

The inflation hasn't trickled down as much to (misleading and outdated) indicators like the CPI. But that's because the average Joe hasn't had their wages increase, and they're just buying what they usually buy. And they're not buying these appreciating assets.

History doesn't necessarily repeat itself, but it does rhyme. And to me this smells like the stagflation of the 1970s. Commodities and hard assets are a good hedge for the investor. The average Joe is gonna get hurt no matter what.

What should the central banks and governments do? I don't have the perfect answer. But continuously inflating assets bubbles only makes the rich richer and poor poorer, and is kicking the can down the road. They should let natural economic cycles take their course, otherwise we'll have bigger problems in the future.

Now, I'm not oblivious to the virus and its effect on life in the last year. I'll save my take on that because it's a sensitive topic. But in my opinion the cure has been way worse than the disease.


----------



## MrMatt

OptsyEagle said:


> Perhaps a little early to sound an alarm bell but 6 months ago the 10 year Cdn Government bond yielded 0.56% and today it is around 1.32%. US rates have risen in a similar fashion.
> 
> As we know, interest rate movements will eventually affect the stock market but probably worse, the housing market, which can derail banking and of course no stock market can hold up during a banking crisis.
> 
> Not trying to be a buzzkill but it is kind of interesting. I think we have a central bank talking about low interest rates for a few years and here we have more then a double in rates in 6 months. Does this foresee inflation? We all know this money printing has to create it someday. Right now my opinion is that productivity improvements have offset the effects of money printing to subdue inflation, but I doubt we can keep up this productivity gains forever.
> 
> Any thoughts?


That's a big jump, were do you watch interest rates.
Back of the envelope suggests a 1% increase to mortgage rates over the next 5 years, which I think many will find unaffordable.
That explains the recent talks about the housing market, if you want to downsize in the next decade, sell now!!


----------



## doctrine

Of course there is inflation and money printing. But you can't take advantage of that - it's already in the prices of assets like real estate, gold, cryptocurrencies, and growth stocks. 

You either believe central banks will tighten, or they will never tighten. Of course they will tighten. And so everyone should be thinking what it will look like. 

Smart money is already moving this way. You can see it in the interest rate trade. Go look at anything - utilities, consumer staples, bonds, insurance companies, rate-reset preferred shares, etc. Money is already positioning this way.

Fortunately for me, my re-opening/cyclical/value trade is also now an inflation hedge - just one more reason to own commodity stocks.


----------



## like_to_retire

MrMatt said:


> That's a big jump, were do you watch interest rates.


I find the best place is:









Selected Bond Yields


View or download the latest data for bond yields, marketable bond average yields and selected benchmark bond yields.




www.bankofcanada.ca





Played with the chart and turned on only 10 year bonds and last 9 months time frame. See attached.










ltr


----------



## OptsyEagle

I guess I am wondering what is causing that upward spike?

I agree that forecasting future fallout is near impossible but it still seems interesting to see this kind of spike. Perhaps it was just because it was the least expected scenario, which is usually the one that end up happening in markets like this.


----------



## like_to_retire

OptsyEagle said:


> I guess I am wondering what is causing that upward spike?


That's an easy answer - printing money with gay abandon.

ltr


----------



## sags

Unless Fed Chairman Powell is blowing smoke, I doubt the US will raise interest rates anytime soon.

What he said they will do is initiate QE and buy T-bills if interest rates get too high.


----------



## AltaRed

Agreed. The anticipation of inflation to come. Continued easy money WILL increase CPI as asset inflation trickles down.

The longer the central bank holds short term rates down, the higher the yield on 10 year bonds will go. BoC can't keep buying 10 year bonds indefinitely to push prices up (yields down) and when they throw in the towel, they will probably have to do so by boosting short term rates and taking yet more liquidity out of the system. It is not out of the question for short term rates to jump 1 percentage point in fairly short order, e.g. 2022.


----------



## james4beach

OptsyEagle said:


> I guess I am wondering what is causing that upward spike?


Bond yields were depressed both because of the central bank action, but also because of the "flight to safety". Nervous investors were staying out of equities and other risk assets, and were hiding in bonds. That kept yields low.

Today, as you'll notice in the stock market, people are much more optimistic and much more in a risk-taking mood. So people are selling off the flights to safety. Bonds are becoming unpopular as people turn more bullish on stocks and more willing to take risk in general.

Inflation expectations are higher as well. Maybe 10 months ago it looked like we could be in a global depression and complete halt to the economy, so inflation was expected to be low, perhaps even negative. Today inflation expectations are a bit higher, with many people expecting a rebound to normal economy pretty soon.

It's very normal for bond yields to go higher during economic expansion periods, with a strong stock market.

That being said, most large corporations also have enormous debts and are affected by the rising 10 year yield. So bond yields can only go so high before they start being a problem for the stock market.


----------



## nathan79

OptsyEagle said:


> As we know, interest rate movements will eventually affect the stock market but probably worse, the housing market, which can derail banking and of course no stock market can hold up during a banking crisis.


No worries... borrowers can handle much higher interest rates. Don't forget they had to qualify at the stress-tested rate of 4.79%. And of course mortgage brokers would never bend the rules, would they? Am I right??? .... _crickets_

Seriously though, housing is too big to fail, so there's no way the government won't try to prop it up somehow. They've already shown that they will do whatever it takes.


----------



## Money172375

nathan79 said:


> No worries... borrowers can handle much higher interest rates. Don't forget they had to qualify at the stress-tested rate of 4.79%. And of course mortgage brokers would never bend the rules, would they? Am I right??? .... _crickets_
> 
> Seriously though, housing is too big to fail, so there's no way the government won't try to prop it up somehow. They've already shown that they will do whatever it takes.


I wish I could have bent the qualifying rate rule. That input field was locked down in the software I used As a lender. Qualifying was tough when I left a few years back. I have no worries about mortgage defaults. That being said, I rarely worked with first time buyers so I’m not up to speed on their financial situation.


----------



## Ponderling

A little while back (can't seem to locate the post) I suggested this house FOMO was not going to end well because bond yields would swell, and mortgage rates rise in turn.

So, tongue only partially in cheek, who is interested in kicking in 50K a piece to form a a syndicate?

We get together to buy foreclosed houses from the banks, slap some lip stick on them, and have a captive starving realtor work on a fixed salary of sale to sell them for us?


----------



## nathan79

Money172375 said:


> I wish I could have bent the qualifying rate rule. That input field was locked down in the software I used As a lender. Qualifying was tough when I left a few years back. I have no worries about mortgage defaults. That being said, I rarely worked with first time buyers so I’m not up to speed on their financial situation.


Maybe it is as you say, but that begs the question -- who is buying in this market? If the median household income is 85K for example, then what size mortgage does that buyer qualify for at 4.79%, assuming they put 10% down? It's hard to know the financial situation of all buyers, but something tells me that average buyers are not getting mortgages for $600K condos or $1.2M houses, so it must be mainly the upper middle class and wealthy who are buying at current prices. And given the amount of activity in the market, there must be a LOT of them buying. These marginal buyers can keep the market going until they dry up, but I'm assuming there isn't an endless supply of such buyers. They will dry up eventually, and particularly if rates do start going up. And it goes without saying that lower and middle income buyers aren't going to jump in to fill the void unless prices start coming down significantly. That's assuming the government actually lets housing correct.


----------



## Retiredguy

And the youngins haven't seen just how ugly the housing market can get. c1980-81 my house went from 150K up to 275K over a period of 9 months then overnight back to ~150 and nothing was selling. Interest rates shot from ~11 up to ~19% and people were walking away from their homes in droves. Lots of business failures and job loss. Canada Savings Bonds paid 19.5% in 1981.


----------



## Money172375

nathan79 said:


> Maybe it is as you say, but that begs the question -- who is buying in this market? If the median household income is 85K for example, then what size mortgage does that buyer qualify for at 4.79%, assuming they put 10% down? It's hard to know the financial situation of all buyers, but something tells me that average buyers are not getting mortgages for $600K condos or $1.2M houses, so it must be mainly the upper middle class and wealthy who are buying at current prices. And given the amount of activity in the market, there must be a LOT of them buying. These marginal buyers can keep the market going until they dry up, but I'm assuming there isn't an endless supply of such buyers. They will dry up eventually, and particularly if rates do start going up. And it goes without saying that lower and middle income buyers aren't going to jump in to fill the void unless prices start coming down significantly. That's assuming the government actually lets housing correct.


Down payment gifts from parents and new Canadians are fuelling it.


----------



## Covariance

If you look to the inflation break even spread (Treasury-TIPS) the market is forecasting higher inflation in the near term than long term. Atypical pattern. Normally inflation is procyclical - it is expected to pick up as the economy grows farther and farther away from the recession. Not what bond prices are predicting at the moment (at least in the US). But there is a perfectly logical explanation - supply shock. With a supply shock prices increase with lower quantities. IE inflation when the economy is weak.


----------



## james4beach

I think one of the best things us fixed income investors can hope for right now is a powerful mania in stocks & risk assets.

If speculation in tech stocks & bitcoinz goes nuts, it should suck money out of bonds and into risky gambles. That will drive interest rates up.

I was worried that we'd be stuck with 0% yields in fixed income for a long time to come, but that's clearly not the case, which is great news I think.


----------



## james4beach

Argonaut said:


> Inflation has already happened from all of this debt/money printing. You can see it in the inflation of asset prices -- stocks, real estate, etc. And you have little speculative bubbles here and there in SPACs, cryptocurrency, and so on.


It's also possible that the bond market is looking at the current situation with speculative manias, and figures that the Federal Reserve will be forced to raise interest rates and/or reduce their QE stimulus.

The crazier the GameStop/Bitcoin gambling gets, the greater the chance the Federal Reserve will tighten.

Remember that at this point, even just the Federal Reserve 'easing off' on the amount of stimulus is equivalent to tightening. The market is absolutely addicted to central banks flooding money into the market.

Beware: the S&P 500 is also addicted to Federal Reserve stimulus.


----------



## fplan

All govts/Corporation/people are drowned in debt. Interest rates may not rise significantly. Maybe 5yr fixed mortgage will come to 2.25 at the most. otherwise western economies collapse and there will be riots.

If you believe the stories written in mainstream media, you will lose big time. If you are in Ontario, invest in RE only. In the last two years, I would have made close to 400k in RE , but believing stories like RE are overvalued, rates will rise stories did not let that happen.

skip Starbucks coffee, invest that money, you will become a millionaire is the thing of the past.
Borrow as much as possible and invest in Ontario RE to become a millionaire is valid for now and the future.


----------



## james4beach

The US 10 year bond just fell off a cliff. If you look at the 10 year treasury note you can see that something very significant happened to it today.

This should get interesting. Notice that the stock market isn't thrilled about it.


----------



## OptsyEagle

I guess all I had to do was wait a couple days and everyone would have been watching interest rates. I thought the discussion would have started taking place when it went through 1% but I guess 1.50% was the right number. What was I thinking? lol.


----------



## MrBlackhill

doctrine said:


> The US 10 year breaking 1.5% would be big news.


Big news.


----------



## james4beach

GIC rates are starting to look better. Here's the current view at iTrade... already these interest rates are higher than a week ago.

I expect these rates to increase in the coming days. There is usually a lag versus the bond market.


----------



## OptsyEagle

james4beach said:


> GIC rates are starting to look better. Here's the current view at iTrade... already these interest rates are higher than a week ago.
> 
> I expect these rates to increase in the coming days. There is usually a lag versus the bond market.
> 
> View attachment 21344


and for anyone who is familiar with the banking business knows where all that GIC money is mostly lent out...mortgages. If one goes up the other will almost always follow.

Luckily for now, these moves are not overly significant but they do deserve watching.


----------



## james4beach

OptsyEagle said:


> and for anyone who is familiar with the banking business knows where all that GIC money is mostly lent out...mortgages. If one goes up the other will almost always follow.
> 
> Luckily for now, these moves are not overly significant but they do deserve watching.


Yeah, it will be interesting to see how far rates increase. I think the stock market is starting to get nervous about higher interest rates.

One thing I always kind of laugh at is how people tell me my fixed income investments are dangerous, because interest rates "have nowhere to go but up". And... that makes stocks safer?


----------



## OptsyEagle

I also wonder if this current move is really just a move from "abnormal" to "more normal" but like all moves the answer is only known after it is all over.


----------



## james4beach

OptsyEagle said:


> I also wonder if this current move is really just a move from "abnormal" to "more normal" but like all moves the answer is only known after it is all over.


Could be a million different things going on. But I might make myself a drink tonight and head over to CNBC to see what the talking heads are flapping about.

Maybe everyone is selling their bonds and buying bitcoin instead, since it's the future. lol


----------



## m3s

james4beach said:


> GIC rates are starting to look better. Here's the current view at iTrade... already these interest rates are higher than a week ago.
> 
> I expect these rates to increase in the coming days. There is usually a lag versus the bond market.


Too bad I can't sell/trade GICs. I have way better rates from 11 months ago.. but locking up funds was a huge opportunity cost in hindsight. Who knew

Anything below 2% is just decaying fiat



m3s said:


> Just built my first GIC ladder:
> 
> 3 months 2.45% (EQ Bank)
> 6 months 2.8%
> 1 year 2.8%
> 1.5 year 2.85%
> 2 year 2.9%
> 3 year 3%
> 4 year 3.1%
> 5 year 3.2%
> 
> Will compare rates in 6 months to see if it's worth building more


----------



## Beaver101

james4beach said:


> GIC rates are starting to look better. Here's the current view at iTrade... already these interest rates are higher than a week ago.
> 
> I expect these rates to increase in the coming days. There is usually a lag versus the bond market.
> 
> View attachment 21344


 ... I'm looking at your chart. Does iTrade just start with a 2 year term (ie. don't offer 1 year 'cauase Scotia Mortgage at .45 for 2 years is like "why bother"?


----------



## james4beach

Beaver101 said:


> ... I'm looking at your chart. Does iTrade just start with a 2 year term (ie. don't offer 1 year 'cauase Scotia Mortgage at .45 for 2 years is like "why bother"?


I clicked Compounding Annual GICs. I think this view doesn't show 1 year since compounding doesn't apply. I only ever buy 5 year GICs myself, so this table is showing compounding rates sorted by the 5 year rate.

My guess is that in the coming days/weeks these rates may go higher by 10 basis points


----------



## Numbersman61

As one who holds rate reset preferred shares, today was a good day.


----------



## AltaRed

james4beach said:


> I clicked Compounding Annual GICs. I think this view doesn't show 1 year since compounding doesn't apply. I only ever buy 5 year GICs myself, so this table is showing compounding rates sorted by the 5 year rate.


That is correct.


----------



## james4beach

Interest rates are still going up, and the stock market doesn't seem to like it.

At what point do we have to start worrying about the real estate market? The main reason home prices go up are low interest rates, and continuous interest rates cuts. I never bought the stories about foreign buyers/speculators being responsible ... I really think that low interest rates have fuelled the RE bubble.

This summer, when interest rates were slashed, I saw 3 friends go out and buy homes. For one, it was the couple's first home. For another one it was the man's second home, a second property he bought _for fun! _He was able to get a 1.0% mortgage from HSBC and said he had to buy.

The bond market seems to be forecasting somewhat higher interest rates and inflation to come. My guess is, if rates go high enough, this whole RE market collapses.


----------



## MrBlackhill

james4beach said:


> Interest rates are still going up, and the stock market doesn't seem to like it.
> 
> At what point do we have to start worrying about the real estate market? The main reason home prices go up are low interest rates, and continuous interest rates cuts. I never bought the stories about foreign buyers/speculators being responsible ... I really think that low interest rates have fuelled the RE bubble.
> 
> This summer, when interest rates were slashed, I saw 3 friends go out and buy homes. For one, it was the couple's first home. For another one it was the man's second home, a second property he bought _for fun! _He was able to get a 1.0% mortgage from HSBC and said he had to buy.
> 
> The bond market seems to be forecasting somewhat higher interest rates and inflation to come. My guess is, if rates go high enough, this whole RE market collapses.


I'm no expert but I don't think rates will keep moving higher and higher. They will continue their trend: lower highs and lower lows. The 10Y bond rate for instance shouldn't go higher than 2.5% in the next years and I believe it won't go above 2% in the short term. We are still bary at the pre-pandemic level.

Again, I'm no expert but someone buying a property in 2019 was stress-tested for 5.34% while getting a 5-year variable rate around 2.70%. That means the stress-test was a rate 2.64% higher.

Now, the stress-test rate is 4.79%. In 2020, the 5-year variable could be bought around 0.99%. That means the stress-test was at least 3.80% higher. Even if rates go up to 3% in the next 5 years, I don't think the RE will collapse.

The selling price will decrease in response to increasing rates, but it won't collapse. As rates were dropping during the pandemic, here in Quebec we saw housing prices rise +25% year-on-year. We'll certainly get a small correction as rates start rising, but I'm pretty sure that prices will remain above their pre-pandemic level.


----------



## Money172375

Here’s a nice place in Toronto that listed for $729,000. Apparently the lot size of 20x100 is considered “decent” for the neighbourhood.









This tiny Toronto garage was listed for $729,000. It sold in only three days


The property on Greenwood Avenue was being sold for its land value and only lasted three days on the market before it was conditionally sold.




www.thestar.com


----------



## MrMatt

james4beach said:


> Interest rates are still going up, and the stock market doesn't seem to like it.
> 
> At what point do we have to start worrying about the real estate market? The main reason home prices go up are low interest rates, and continuous interest rates cuts. I never bought the stories about foreign buyers/speculators being responsible ... I really think that low interest rates have fuelled the RE bubble.
> 
> This summer, when interest rates were slashed, I saw 3 friends go out and buy homes. For one, it was the couple's first home. For another one it was the man's second home, a second property he bought _for fun! _He was able to get a 1.0% mortgage from HSBC and said he had to buy.
> 
> The bond market seems to be forecasting somewhat higher interest rates and inflation to come. My guess is, if rates go high enough, this whole RE market collapses.


It matters what they thing is more damaging.

The problem is everyone knows this, and the government has been very clear, they intend to keep rates extremely low for the foreseeable future. So people are comfortable taking on even greater leverage.
I think that even a 1% mortgage rate increase will cause significant impacts, if we see rates increase by 2-3% over the next 5 years (when all these mortgages come due) we'll see a pretty severe crash.

"knowing" that, I think people are even more likely to keep the high debt levels

They really should be pushing to hike rates now, at least to challenge the psychology of the market.
FWIW I'm variable, but I can easily withstand a rate hike of a few %

Now is the time to deleverage, I think even small increases in rates are going to have some pretty severe impacts.


----------



## MrBlackhill

Isn't that ironic?

When interests rate are low, debt is cheap, so you can take on debt.
But when interests rate are low, if you have too much debt and the interests start rising, then you are in a bad position, so you should reduce your debt.

People reduce their debt only when they are forced to, when interests are truly rising.

At the moment, we are just in the usual volatility of a down trend with lower highs and lower lows. Not sure what will be the cataclysm required to reverse that trend.


----------



## hfp75

Heres an interesting article...









Larry Berman: Bond vigilantes are back


Larry Berman joins BNN Bloomberg to discuss the return of bond vigilantes.




www.bnnbloomberg.ca





Will the Fed control rates ? Keep them at certain thresholds ??? Or let things just go - we will see...


----------



## james4beach

MrBlackhill said:


> I'm no expert but I don't think rates will keep moving higher and higher.


Then you probably don't want to be in stocks or real estate.

I thought you were very bullish on stocks though, especially on the high risk growth ones? How can you simultaneously be projecting stocks going up, and interest rates going up too?


----------



## MrBlackhill

james4beach said:


> Then you probably don't want to be in stocks or real estate.
> 
> I thought you were very bullish on stocks though, especially on the high risk growth ones? How can you simultaneously be projecting stocks going up, and interest rates going up too?


I don't think.

Sorry, that's a bad habit from Quebec french-speaking people, we always use negative syntax.


----------



## Covariance

hfp75 said:


> Will the Fed control rates ? Keep them at certain thresholds ??? Or let things just go - we will see...


Central Banks control short term and overnight rates. Influences other parts of the curve by intervening through actions such as buying bonds. As long as a country is part of the integrated global financial system, market forces will prevail over this influence. The bankers know this. They are letting the 10(s) come up to take the froth off speculative assets. If it gets out of control they will act as expected to bring stability.


----------



## MrMatt

Covariance said:


> Central Banks control short term and overnight rates. Influences other parts of the curve by intervening through actions such as buying bonds. As long as a country is part of the integrated global financial system, market forces will prevail over this influence. The bankers know this. They are letting the 10(s) come up to take the froth off speculative assets. If it gets out of control they will act as expected to bring stability.


Stability isn't the only goal, it's one of many factors.


"Doctor Doctor, how's the patient"
"Don't worry, he's stable"
"Can we talk to him?"
"Of course not, he's dead"
"But you said he was stable"
"He is"


----------



## MrBlackhill

MrMatt said:


> "Doctor Doctor, how's the patient"
> "Don't worry, he's stable"
> "Can we talk to him?"
> "Of course not, he's dead"
> "But you said he was stable"
> "He is"


😂


----------



## OneSeat

MrBlackhill said:


> I don't think.
> Sorry, that's a bad habit from Quebec french-speaking people, we always use negative syntax.


_N'est_-ce _pas_


----------



## MrBlackhill

OneSeat said:


> _N'est_-ce _pas_


And sometimes we make it even worse with double negatives. I could've said "_I don't think that rates won't keep moving lower and lower_" to mean "_I think that rates will keep moving lower and lower_"_._


----------



## 30seconds

Can someone explain this to me. Look at the prime rate of Canada from 2009 - 2021 the lowest it was is 2.25% (2009) up to 3.95% (2019). It was at 3% between 2010 and 2015 and then at 2.7% till 2017. See here: Canada Prime Rate History | Prime Rate vs. Overnight Rate

With that being said how can the 10 years go much higher than what we have seen from 2009-2021? 

Depending on the answer to that, isn't it likely that Canada's prime rate won't go above 3%? Most variable mortgages have a discount of 1.15 right now so if prime hits 3%, it'll be 1.85%. Are people really going to default on their mortgages at 1.85%?

I must be missing something.


----------



## james4beach

hfp75 said:


> Will the Fed control rates ? Keep them at certain thresholds ??? Or let things just go - we will see...


In case anyone is curious, I outlined a worst case scenario here (bond carnage) in bond ETFs









Fixed Income / Bonds....


Fixed income bond funds such as VAB and XBB have been hitting fresh 4 year lows. Relatively though, they have been dropping less than the index, so they have been doing their job as a good portfolio stabilizer. Kind of reminds me of 10 years ago when everything went down together, just that...




www.canadianmoneyforum.com





If something like that happens, people will really feel the pain. There are many investors holding bond funds who believe they are quite stable... and they are, compared to stocks... but there is still the potential for sharp volatility.

My own guess... I don't think the drawdown would be as severe as 15%. We are currently a bit under 6% loss.

The American fund IEF, which is kind of 'ground zero' for what's happening now, is around 7% loss.


----------



## OptsyEagle

The other problem with bonds is fear. In stocks I tend to find people begin the irrational process around -10% but it usually requires around -20% to get the more experienced investors to act irrationally. Bonds however, tend to draw the more conservative risk averse investors. Many of these people have the wrong belief that a bond etf or fund that invests in only guaranteed bonds cannot go down. As we know, that is not correct. So these people tend to get spooked at a much lower drawdown level causing a little more volatility in the investment then what should be there. Luckily they make up only a small component of the people investing in these underlying securities, but at the margin, they can cause some price gyration.

Two things that do help a bond investor. The first one is fairly obvious, and it is the coupon interest continuously being paid. This helps soften the losses on the capital to some degree. The 2nd is time. Over time the bonds maturity date decreases. In a normal yield curve, that means as time goes by the interest rates on any bond tends to go down, driving its price up. The steeper the curve the more the rates go down. So in a rising interest rate environment you also have this natural declining rate environment superimposing itself and also offsetting some of the losses that would otherwise have happened.

That said, when you see rates rise, like the 10 yr has in the last 6 weeks or so, very little is available to soften that loss into a gain. But once that increase levels off the other two natural gainers kick in to make the results for the year considerably better, then what appears is going to happen when looking at only the short term result.

Lastly, most bonds are an asset allocation to give some form of offset or dilution to ones stock portfolio. So when one is loosing money in bonds, they usually are making it hand over fist in the stocks. It is probably a good thing. A lot better then the reverse where one is making money in bonds, but with no hope of that offsetting the large losses they are experiencing in the stock market.


----------



## james4beach

OptsyEagle said:


> Lastly, most bonds are an asset allocation to give some form of offset or dilution to ones stock portfolio. So when one is loosing money in bonds, they usually are making it hand over fist in the stocks. It is probably a good thing.


I agree with all your points @OptsyEagle and it's very true that risk-averse investors are spooked more easily by volatility. Bond investors get nervous at normal volatility. I actually think that the financial media tries to exploit this, because you will notice that they do a lot of fear mongering when bonds decline a little bit. I suspect it's a trick fund managers use to attract money away from conservative investors.

Your last point about the role in asset allocation is really worth emphasizing. This is so important, and took me quite a few years to grasp ... the goal in a diversified portfolio (asset allocation) is NOT to constantly make money in everything you hold. That's an unreasonable expectation. Instead, the goal is to have some asset that's performing well, when another is performing poorly.

In the last 6 months, stocks are up about 14% and bonds are down 4%. This is perfectly normal and *it's desirable*. It's good to see that these assets are _uncorrelated_, because this is the key trait which makes diversification and asset allocation work.


----------



## OptsyEagle

If everything you own is earning money, then it is a pretty good indication that you are not very well diversified.


----------



## MrBlackhill

Should equity investors be worried of rising interests rates?


----------



## james4beach

MrBlackhill said:


> Should equity investors be worried of rising interests rates?


Now try an analysis of the forward 10 year return of a bond fund from each of those dates. e.g. from 6/2003 (the longest rate rising cycle shown in that table) IEF returned 5.3% CAGR

I think you'll find that the forward 10 year return is quite good, even when you start during those "prolonged periods of rising rates"

The way rising rates tend to hit a bond fund is, initial volatility and maybe no returns for a while, until the bonds roll over at higher yields and boost the returns.


----------



## Covariance

james4beach said:


> I think you'll find that the forward 10 year return is quite good, even when you start during those "prolonged periods of rising rates"


Undoubtably - it's a 30 year bull run. Each upswing in rates stopped at a lower high for 28 years (the '18 run-up only just surpassed '14). Then the trend down continues through to 2021. Unless one sold their bonds at precisely the wrong time they only had to hang in and sell at a higher price, or get par, and all along receive their coupon rate.


----------



## doctrine

MrBlackhill said:


> Should equity investors be worried of rising interests rates?


This is an excellent chart and I saw similar data trucked out in both 2013 and 2017. I am sure there is an increase in volatility though. And I also note that 2014 and 2018 were two of my worst investing over that period as they were bear markets. Not caused immediately after rates rose, but it definitely happened, although not necessarily because of only that factor.


----------



## james4beach

The more serious "rising rate" scenario was in the 1970s. The analysis posted above looks at a period where interest rates were trending downward, with only short stretches of rising rates.

Here's the period we should worry about more.

Rates went up significantly from 1972 (start of available data) to 1983. Stocks did absolutely terribly, first crashing with a 46% drawdown, and had a 6 year stretch of 0% nominal returns (with very negative real returns).

Even *10 years later*, in 1982, stocks still had a 0% real return... had actually lost in real terms, even after a decade.

People conveniently forget about stocks in the 70s. Bonds had a negative real return too, but as you can see in the chart, were much more stable and in fact, bonds outperformed stocks during the high inflation 70s. On a risk-adjusted basis, bonds were a much better investment while rates shot up in the 70s.


----------



## MrBlackhill

james4beach said:


> The more serious "rising rate" scenario was in the 1970s.


The main cause of the stock market crash in 1973-1974 was not the rising rates, it was the oil crisis. Oil price jumped from $20 to $55.

In the 1980s though, there was 2 bear markets due to real interests rates rising above 5% in 1981 to mid-1982 and then mid-1983 to mid-1984.






Real Interest Rate - 151 Year Chart | Longtermtrends


The real interest rate is calculated as the difference between the nominal interest rate and the inflation rate. This chart displays the nominal interest rate of a 1-year US Treasury bond, the US inflation rate, and the resulting one-year real interest rate.




www.longtermtrends.net





So, do you believe we are about to have interests rates rising 5% higher than inflation, causing a bear market for the stock market?


----------



## doctrine

MrBlackhill said:


> The main cause of the stock market crash in 1973-1974 was not the rising rates, it was the oil crisis. Oil price jumped from $20 to $55.


In 1973 over the course of 6-7 months, oil jumped 4 times in price - 300%. From $3 to $12 a barrel in nominal value at the time. 

So imagine if oil went from $65 today to $260 in the next 6 months, just like 1973. That could definitely hit stocks really hard. That would be real money leaving the economy to keep people's cars running, food cooked, and houses warm. You know, important stuff, not like spending your money on crypto or GME.

Capital investment is down massively in a industry that requries massive capital investment. There could easily be a shock or who knows what that could cause a spike. Watch out.


----------



## Covariance

Now that the US 10s have started to settle into a range, and every major publication has pushed out article after article about "inflation is coming" scaring off the crowd, I wonder if it is time to consider getting back in.


----------



## Eclectic12

doctrine said:


> In 1973 over the course of 6-7 months, oil jumped 4 times in price - 300%. From $3 to $12 a barrel in nominal value at the time.
> So imagine if oil went from $65 today to $260 in the next 6 months, just like 1973. That could definitely hit stocks really hard ...


Sure ... but that would miss out on the effects of the US stopping being the top producer, coupled with OPEC stopping shipments to the US and other countries at the same time.
There were more factors in play than just price increases.

Cheers


----------



## james4beach

The Bank of Canada released a statement on its strategy going forward, how it's going to handle stimulus



> The roadmap laid out by Macklem is consistent with what economists and markets have been anticipating -- a final taper later this year to bring net purchases of bonds to about zero, followed by a first rate hike later in 2022. *Swaps trading suggests that investors are pricing in a 100 per cent chance of a hike over the next 12 months*. Three hikes over the next two years are fully priced in, which would leave Canada with the highest policy rate among Group of Seven economies.


Notice what the derivative market already believes. The market is expecting several rate hikes over the next two years.









Bank of Canada vows to hike rates before reducing bond holdings - BNN Bloomberg


The Bank of Canada released guidance for the first time on how it plans to eventually reduce monetary stimulus, saying it will first raise interest rates before curbing its holdings of government bonds.




www.bnnbloomberg.ca


----------



## MrMatt

james4beach said:


> The Bank of Canada released a statement on its strategy going forward, how it's going to handle stimulus
> 
> 
> 
> Notice what the derivative market already believes. The market is expecting several rate hikes over the next two years.


We desperately need to hike interest rates, but the politics will be risky.
With near zero rates, housing has rocketted up, even small hikes are going to tank the real estate market, and put people in dire straits.
Talking to people, many are maxxed out on variable <2% mortgages. They've very vulnerable. 

Too many people are in too much debt, we're simply overleveraged, the individual person/family all the way up to the government.

I've been lucky, I didn't go crazy during COVID with renos, and didn't pile on debt.


----------



## Spudd

MrMatt said:


> I've been lucky, I didn't go crazy during COVID with renos, and didn't pile on debt.


That sounds more like smart than lucky to me.


----------



## MrMatt

Spudd said:


> That sounds more like smart than lucky to me.


Well I was too busy working OT to do renos even if I wanted to.
It was luck that I got so busy.


----------



## james4beach

MrMatt said:


> I've been lucky, I didn't go crazy during COVID with renos, and didn't pile on debt.


Nobody held a gun to these people's heads and forced them to do renos.

People just can't help it. Housing bubble and easy credit, gotta renovate.


----------



## MrMatt

james4beach said:


> Nobody held a gun to these people's heads and forced them to do renos.
> 
> People just can't help it. Housing bubble and easy credit, gotta renovate.


People are stupid..


----------



## james4beach

Bonds seem to be falling swiftly now, and yields are rising.

Maybe interest rates are finally going up? Not the central bank overnight rate (yet) but the rest of the yield curve seems to be moving higher.

Would be excellent, if it happens.


----------



## KaeJS

james4beach said:


> Bonds seem to be falling swiftly now, and yields are rising.


I have been noticing this.
I actually alllllmost added to my bond component earlier this week but I have held off for now.

My bond component is 2% of my portfolio 😬


----------



## james4beach

KaeJS said:


> My bond component is 2% of my portfolio 😬


I'm 50% bonds and GICs. Hoping for higher interest rates ... that leads to better performance.


----------



## Thal81

KaeJS said:


> My bond component is 2% of my portfolio 😬


I whole 2% heh? Why bother holding such a small amount?


----------



## james4beach

These bond yields are going to start getting pretty juicy. Already the XBB yield-to-maturity is over 1.7% which is much higher than any savings account you'll find in the country.


----------



## KaeJS

Thal81 said:


> I whole 2% heh? Why bother holding such a small amount?


I have a 25+ year time horizon.

I'll add more as I age. I usually try to time my bond buying as opposed to adding regularly on a fixed or consistent basis.


----------



## Covariance

Bank of Canada stops QE. With today's announcement we see that once again they brought forward the timeframe for which they will start to raise overnight rates (now middle of 2022 from previous back half and before that end of). 

Watch the belly of the curve, especially after (US) Fed day, next week.


----------



## Numbersman61

As a holder of a fair amount of rate reset preferreds, I am watching the 5 year government bond rate carefully. Pleased to see it keeps rising.


----------



## agent99

Numbersman61 said:


> As a holder of a fair amount of rate reset preferreds, I am watching the 5 year government bond rate carefully. Pleased to see it keeps rising.


I have a number too (~15% of portfolio) I heard something on CBC while driving today. I think they said that BofC said that current 4.5% inflation rate could climb to 5% by middle of next year, but after that fall back to the 2% target rate. Presumably GOC5 rate will do something similar. If so, we will have to be lucky to have reset dates that coincide with high GOC5 rates! Most of mine are dated 2022-2025. Bought at discount, so at today's GOC5, most will reset in 6-6.5% range on cost. Some of those may be called!


----------



## james4beach

According to this Bloomberg article, here's what happened in today's BoC announcement. You can find more articles at bnnbloomberg

the BoC ended its government bond-buying stimulus program (QE)
suggested the BoC may increase the policy rate sooner than earlier thought
still pledged to not raise the policy rate until the recovery is complete
The derivative market is pricing in five x 0.25% rate hikes next year... wow. So the market really thinks the BoC is going to tighten soon, by more than 1% ? Really?

The rate is still 0.25% today

Notice they are saying they will not dare raise interest rates until the recovery is "complete". And what does that mean?


----------



## Covariance

james4beach said:


> According to this Bloomberg article, here's what happened in today's BoC announcement. You can find more articles at bnnbloomberg
> 
> the BoC ended its government bond-buying stimulus program (QE)
> suggested the BoC may increase the policy rate sooner than earlier thought
> still pledged to not raise the policy rate until the recovery is complete
> The derivative market is pricing in five x 0.25% rate hikes next year... wow. So the market really thinks the BoC is going to tighten soon, by more than 1% ? Really?
> 
> The rate is still 0.25% today
> 
> Notice they are saying they will not dare raise interest rates until the recovery is "complete". And what does that mean?


Re: your question on "complete" recovery. Essentially, at the moment it is a balance between wanting to see full employment and inflation expectations. [If you want to understand what the BOC is looking at and tracking to make their decisions I suggest you read their info. Start here. They are transparent about what they need to see to raise rates.]

Re: policy rate increases forecast in the futures markets. The quantum of increases has been the case for some time. This week they announced a move forward in timing.. It has always been a question of when lift off starts. Officially BOC now says in the middle quarters of 2022, ie Q2 or 3. Which is a move forward of the timing from past communications. Market participants are voting April through futures market which is of course the beginning of Q2. Then incremental steps of 25bps up from there.


----------



## james4beach

The market is now expecting a rate hike in December.

The market is also expecting the BoC rate to be higher than 1% this time next year.


----------



## hfp75

I think I have read repeatedly that markets are expecting / looking for 8x 0.25 rate hikes..... thats 2%. No specific date given....


----------



## AltaRed

I've only seen some hyperbole reaching that far. The highest they got since 2010 was 1.75% in late 2018.


----------



## MrBlackhill

AltaRed said:


> I've only seen some hyperbole reaching that far. The highest they got since 2010 was 1.75% in late 2018.


Yeah at that time it moved from 0.50% to 1.75% in a bit more than a year from mid-2017 to end of 2018. We should expect the same pattern.

This should start in 2022, continue in 2023. So 2022 won't be a great year for equities and then 2023 will crash hard.


----------



## james4beach

AltaRed said:


> I've only seen some hyperbole reaching that far. The highest they got since 2010 was 1.75% in late 2018.


Yeah and the Montreal interest rate futures are pointing more towards that general zone, for late next year.

I'm still doubtful the Bank of Canada will actually raise that much. One or two raises and the real estate market could be in big trouble. This zero interest rate supported housing bubble is not the kind of party you can just pull the plug on.

But who knows. Should be exciting!


----------



## MrBlackhill

I'm very curious seeing how we'll get out of this loop where we always end up with lower and lower rates.

With the market currently so much overvalued and I expect it to crash within the 5 years, we could end up with negative rates.

We'll start raising rates around mid-2022 until end of 2023 and then BAM! the highly overvalued market will crash much harder than back in 2020 and rates will drop down again.


----------



## hfp75

We need a Volcker moment.... 

Stop manipulating every aspect of finance and let price discovery happen....

This band-aid is the size of California and it'll hurt but get it over with.


----------



## OneSeat

MrBlackhill said:


> We'll start raising rates around mid-2022 until end of 2023 and then BAM! the highly overvalued market will crash much harder than back in 2020 and rates will drop down again.


Wow - great info - do you offer any insurance in case you are out more than, say, six months?


----------



## Covariance

james4beach said:


> Yeah and the Montreal interest rate futures are pointing more towards that general zone, for late next year.
> 
> I'm still doubtful the Bank of Canada will actually raise that much. One or two raises and the real estate market could be in big trouble. This zero interest rate supported housing bubble is not the kind of party you can just pull the plug on.
> 
> But who knows. Should be exciting!


The futures prices are pushed around every time there is a rate announcement, GDP announcement (today), inflation announcement or jobs announcement. 

The best information is in watching the changes to the yield curve. Slope, shape and level changes - its all there.


----------



## MrBlackhill

OneSeat said:


> Wow - great info - do you offer any insurance in case you are out more than, say, six months?


Haha, no, just my personal thoughts, but based on my readings of what banks also expect. The mortgages 5-year fixed rates have already been increased recently due to those expectations.


----------



## Benting

MrBlackhill said:


> Yeah at that time it moved from 0.50% to 1.75% in a bit more than a year from mid-2017 to end of 2018. *We should expect the same pattern.*
> 
> This should start in 2022, continue in 2023. So 2022 won't be a great year for equities and then 2023 will crash hard.


Yes, equities will crash hard, and then it will rose to new high in a year or 2....


----------



## MrBlackhill

Benting said:


> Yes, equities will crash hard, and then it will rose to new high in a year or 2....


Haha maybe not this time, well, not my expectations. I expect the big crash, but not the big recovery. We'll be in 2030 and S&P500 will still be under 4,000. But that's just my personal speculation. More like 2000s, but a bit less intense because valuation spreads aren't as crazy.


----------



## james4beach

MrBlackhill said:


> Haha maybe not this time, well, not my expectations. I expect the big crash, but not the big recovery. We'll be in 2030 and S&P500 will still be under 4,000. But that's just my personal speculation. More like 2000s, but a bit less intense because valuation spreads aren't as crazy


Funny that now I am, relatively, the bull! I expect the S&P 500 to still rise this year.

Who knows though


----------



## MrBlackhill

james4beach said:


> I just put tens of thousands $ into the S&P 500. We'll see. But as you know I'm basically a passive investor and already hedged (to the extent I can) against declines with my bonds & gold


How do you end up adding to your stocks? With stocks at ATH and since you are balancing your asset classes to fixed weightings, I would've thought that all of your cashflow would've been going into bonds or gold which can't keep up with stocks at the moment.

But it's ok, yield curve isn't inverted, so it feels "safe". I hope you'll have a rebalancing not too long after an upcoming yield curve inversion.


----------



## james4beach

MrBlackhill said:


> How do you end up adding to your stocks? With stocks at ATH and since you are balancing your asset classes to fixed weightings, I would've thought that all of your cashflow would've been going into bonds or gold which can't keep up with stocks at the moment.


Edited the post after I realized I miscalculated the net effect. This was some rebalancing and some offsetting between accounts.

Turns out I have no changed in my S&P 500 position. Just a few trades that evened out. My net stock exposure remains the same.

Currently the S&P 500 is 13% of my total portfolio. Unchanged.


----------



## james4beach

MrBlackhill said:


> I would've thought that all of your cashflow would've been going into bonds or gold


Net new purchase today: a 5 year GIC from Canadian Tire Bank at 2.11%

Hopefully we'll see these GIC rates go higher in the coming months.


----------



## MrBlackhill

james4beach said:


> I expect the S&P 500 to still rise this year.


This year is a very short-term prediction, and my expectation between now and EOY are random : between +5% and -5%. Toss a coin.

I can't predict the path in-between 2021 and 2030, but I'm expecting the end result to be S&P 500 below 4,000 in 2030.


----------



## londoncalling

james4beach said:


> Yeah and the Montreal interest rate futures are pointing more towards that general zone, for late next year.
> 
> I'm still doubtful the Bank of Canada will actually raise that much. One or two raises and the real estate market could be in big trouble. This zero interest rate supported housing bubble is not the kind of party you can just pull the plug on.
> 
> But who knows. Should be exciting!


Anybody get the feeling that rates will stay low for a long long time? Just like was/is experienced in Japan. Many predict the inflationary environment will be short lived and normalize once supply chain issues are sorted. It can can interesting to make some guesses but I am not sure any of us will predict it perfectly.


----------



## nobleea

I don't think they can raise rates too fast. The RE sector is too big in Canada and that would not go over well (even if its needed). Plus I think inflating away the debt is kind of the secret plan to reduce the weight of all this governmental debt.


----------



## MarcoE

james4beach said:


> These bond yields are going to start getting pretty juicy. Already the XBB yield-to-maturity is over 1.7% which is much higher than any savings account you'll find in the country.


Interesting to revisit this comment a month later. 2.02% today.


----------



## gardner

HT/Oaken just increased their 5y GIC rate to 2.5%. I think rates will be notching up fairly rapidly now that the BOC and fed have signalled increases coming. I doubt they will get objectively high, but I see the central bank rates returning to 1.5% and retail savings rates back at 3%.


----------



## MrMatt

gardner said:


> HT/Oaken just increased their 5y GIC rate to 2.5%. I think rates will be notching up fairly rapidly now that the BOC and fed have signalled increases coming. I doubt they will get objectively high, but I see the central bank rates returning to 1.5% and retail savings rates back at 3%.


I'm not so sure, it doesn't make sense for retail savings rates to be way above the bank of Canada rate.

We have mortgages at less than 1%.








A mortgage rate of less than 1% now available in Canada - National | Globalnews.ca


HSBC is advertising a five-year variable rate of just 0.99 per cent.




globalnews.ca





A lot of people have mortgages rates less than 2%. 

If the BoC rate flies up, we're going to have a lot of problems.

I think rates should go up, but I think the deleveraging will be painful if not dangerous.

The difference between a 1% mortgage and a 3% is substantial.


----------



## MrBlackhill

People are stress-tested for a rate of something like 5%.

But raising rates will sure have an effect, but it's a better solution as opposed to letting the inflation run like crazy.

Anyways, the system is broken and it'll be the same story again. They'll start rising the policy rate, we'll reach near 2% policy rate, the yield curve will invert, the market will crash, the rate will be dropped back down. Save the rich people. Let the poor stay poor. Don't reduce the wealth gap.


----------



## james4beach

MrBlackhill said:


> They'll start rising the policy rate, we'll reach near 2% policy rate


You really think they will get that high? The current Bank of Canada policy rate is 0.25%.

I think they will barely get to 1% by the end of this year. That would be 3 increases of 25 basis points each. Canadians are very high leveraged and already this will be painful for most people. Businesses, who depend on ultra low rates, will also start screaming in pain.

Hopefully I'm wrong, and hopefully we have much higher interest rates. As a fixed income investor I'd really like better yields in my portfolio.


----------



## KaeJS

MrMatt said:


> The difference between a 1% mortgage and a 3% is substantial.


Not really.
Not unless you're extremely bad with money and totally strapped.

People always find a way to pay for housing. It's important. People forego luxuries to afford it. People will find a way.


----------



## KaeJS

james4beach said:


> You really think they will get that high? The current Bank of Canada policy rate is 0.25%.
> 
> I think they will barely get to 1% by the end of this year. That would be 3 increases of 25 basis points each. Canadians are very high leveraged and already this will be painful for most people. Businesses, who depend on ultra low rates, will also start screaming in pain.
> 
> Hopefully I'm wrong, and hopefully we have much higher interest rates. As a fixed income investor I'd really like better yields in my portfolio.


We don't agree often, but you're right.

We won't even see 1% in 2022.
I think 0.75% would be the max.
But I'm betting on only 0.50.
They will hike once and that's it, imo.


----------



## MrMatt

KaeJS said:


> Not really.
> Not unless you're extremely bad with money and totally strapped.
> 
> People always find a way to pay for housing. It's important. People forego luxuries to afford it. People will find a way.


1% vs 3% is is a 26% higher payment, most people think that's "substantial"


----------



## MrBlackhill

james4beach said:


> You really think they will get that high? The current Bank of Canada policy rate is 0.25%.


Yes, we'll reach 1% this year and they'll try to reach 2% next year, but it won't happen, because as soon as we reach 1.5% we'll be near a market crash trigger.

And then market crash in 2023 or maybe 2024 and then interest rates back to 0.25%... or less.



KaeJS said:


> We won't even see 1% in 2022.
> I think 0.75% would be the max.
> But I'm betting on only 0.50.
> They will hike once and that's it, imo.


Maybe, because we like to save the rich.


----------



## m3s

MrBlackhill said:


> Maybe, because we like to save the rich.


Yet the poor will cry to lower the rates because they don't understand this and just want lower mortgage payments

Ingenious


----------



## Covariance

A few random comments, data points and historical perspectives;
1. Mortgage cost. Floaters are tied to Bank of Canada controlled policy rate (more on this below) whereas fixed rate mortgages are referenced to rates that are subject to market forces. As long as inflation evolves as expected, market forces will move up bond yields and pull up fixed mortgage rates. 
2. The policy rate is going up. Probably faster than most appreciate. It's pretty clear that fiscal policy is driving this thing. Monetary policy (low overnight rates) can't solve supply chain issues. Or keep restaurant workers salaries whole. This is more than abundantly clear to central bankers who do this for a living. As long as Gov'ts are driving stimulus the Central Bankers know they are wasting time and money with artificially low overnight rates that just lead to other problems.
3. Now that Powell has his job renewed, and BoC has their mandate renewed they can be "independent". See point 2 above.
4. BoC's stated "neutral rate" is 1.75% to 2.75%. Historical tightening cycle ~ a year and +1.5% 
5. Historically equities do okay in the early phase of a tightening cycle, volatility increases and tail events occur more often than models would predict. 
6. People are only surprised by things they have never experienced before.


----------



## MrMatt

MrBlackhill said:


> Maybe, because we like to save the rich.


Naw, politicians like votes, and a happy spending public is "good' for everyone.

Very few people really understand the harm from high inflation and excessively low rates.

The people who will get hurt with high inflation are lower wealth, those who get hurt by rising rates and high inflation are the middle wealth.
Don't worry about the rich, they'll be fine no matter what.

You could always go seize their assets, then they'd be screwed too, but you'd also be kneecapping the the economy, which again hurts the poor more.


----------



## Juggernaut92

MrBlackhill said:


> People are stress-tested for a rate of something like 5%.
> 
> But raising rates will sure have an effect, but it's a better solution as opposed to letting the inflation run like crazy.


Not to take this thread on a tangent but if people are stress tested for getting a mortgage at 5% before getting a property why would it matter if their mortgage rate went up from 2% to 3%? (not actual mortgage rates but just as an example). Would it not be assumed they can cover the payments up to 5% interest?


----------



## MrBlackhill

Juggernaut92 said:


> Not to take this thread on a tangent but if people are stress tested for getting a mortgage at 5% before getting a property why would it matter if their mortgage rate went up from 2% to 3%? (not actual mortgage rates but just as an example). Would it not be assumed they can cover the payments up to 5% interest?


Yes, they should. There's no reason why we should not raise rates. Other than continuing inflating the assets of the rich and eroding the savings of the poor due to inflation and low rates.


----------



## MrMatt

Juggernaut92 said:


> Not to take this thread on a tangent but if people are stress tested for getting a mortgage at 5% before getting a property why would it matter if their mortgage rate went up from 2% to 3%? (not actual mortgage rates but just as an example). Would it not be assumed they can cover the payments up to 5% interest?


In theory yes, in reality no.

I know that I could not afford the mortgage I was approved for.


----------



## londoncalling

Most people's spending is always at a limit. An increase to mortgage rates will be met with mortagors extending term duration to keep payments affordable. Some that were at the limit will feel the squeeze and either sell toys to make it work. Realistically we would need larger quicker increases to pop the housing bubble. It will however make it harder for those trying to buy their first properties to do so unless housing prices come down to make it a wash. 

I fear inflation more than I do a rate increase. Savers have been punished for far too long. an increase of 1% over the next year or so should not really draw this much attention. I watched some talking heads last night speak about the tech wreck we are experiencing. What a laugh. Prices are where they were 3 weeks ago. A 15 day chart looks scary but a 3 or 5 year chart shows their meteoric rise. It's all about perspective.


----------



## Juggernaut92

MrMatt said:


> In theory yes, in reality no.
> 
> I know that I could not afford the mortgage I was approved for.


I see. Now I am curious. Would you say this is the case because your financial situation changed? (lower income job than before etc).

I do not have a mortgage but I do see how if people were stress tested for 5% but only actually pay 2% interest on their mortgage then it would make sense to just spend that 3% difference on other items.



londoncalling said:


> It will however make it harder for those trying to buy their first properties to do so unless housing prices come down to make it a wash.


Can you elaborate on this? If banks are charging 2% interest rate currently and overnight interest rates raise and then banks are now charging 3% interest rate wouldn't that not matter because everyone gets stress tested at 5%?


----------



## nathan79

I'm hearing that about half of buyers are failing the stress test but still being approved under what is called a variance -- which is basically alternative criteria to determine if they have the means to afford the mortgage. This is all supposedly legit, but it sounds very opaque to me.


----------



## OptsyEagle

Juggernaut92 said:


> I do not have a mortgage but I do see how if people were stress tested for 5% but only actually pay 2% interest on their mortgage then it would make sense to just spend that 3% difference on other items.
> 
> Can you elaborate on this? If banks are charging 2% interest rate currently and overnight interest rates raise and then banks are now charging 3% interest rate wouldn't that not matter because everyone gets stress tested at 5%?


You need to apply for a mortgage to see the ridiculously high amount the bank would be willing to lend you. It is way higher then people can actually afford. I suspect the math that goes into it accounts for the fact that they assume those same people will simply stop spending money on other items in life and focus on the higher mortgage amount, if rates rise. In any case, since real estate prices have become almost unaffordable, people have been taking out those maximum lending amounts, for quite a long time now.

Two problems when their interest rates and payments rise:

1) Too many people will just generate more debt by using credit cards and LOC to pay for the other items they will still want, that they have become sort of dependent on.
2) If rates keep going up they tend to create a slow down in economic growth, that can create the unemployment necessary for all these problems to hit the fan at the same time. All stress tests assume a continuation of the family income.

That is the real problem. The stress test on a higher amount is meant to give some slack to account for this but it has yet to be tested if it will be enough.


----------



## MrMatt

Juggernaut92 said:


> MrMatt said:
> 
> 
> 
> I know that I could not afford the mortgage I was approved for.
> 
> 
> 
> I see. Now I am curious. Would you say this is the case because your financial situation changed? (lower income job than before etc).
Click to expand...

Nope, the "qualification" amounts are ridiculous IMO.



> Can you elaborate on this?


Run the numbers
I just ran with the defaults from a government calculator.








Mortgage Qualifier Tool


Find out if you can qualify for a mortgage based on the property you want, your income and your expenses.




itools-ioutils.fcac-acfc.gc.ca




I came up with After Tax income, in Ontario.








$60,000 income tax calculator 2022 - Ontario - salary after tax


If you make $60,000 in Ontario, what will your income after tax be? The Talent.com Online Salary and Tax Calculator can help you understand your net pay.




ca.talent.com





For a Gross income of 60k, they say you can qualify for a mortgage of $200k, and payment of $1163.21/month
With their assumptions that's $1963.21/month in total debt. (+ heat & property tax)

Not bad, right?
But your after tax income is $3816/month, so you're left with $1850/month for everything else.
Electricity, car insurance, water bill, internet/cell phones, (another 300-400) leaving you with $1450/month, or about $300/week
The average family spends $220wk on food. How much does a week of groceries cost in Canada? We crunched the numbers - National | Globalnews.ca

This leaves $80 for gas, clothing and all the other incidentals. Let alone any savings.

I think most people have trouble affording the maximum mortgage they legally qualify for.

As Optsy says, you have to apply and see what kind of mortgage they'd offer you, but you could run the government calculator, then see how it fits into your budget. I think the amounts they let you borrow are almost predatory.


----------



## londoncalling

Juggernaut92 said:


> I see. Now I am curious. Would you say this is the case because your financial situation changed? (lower income job than before etc).
> 
> I do not have a mortgage but I do see how if people were stress tested for 5% but only actually pay 2% interest on their mortgage then it would make sense to just spend that 3% difference on other items.
> 
> 
> Can you elaborate on this? If banks are charging 2% interest rate currently and overnight interest rates raise and then banks are now charging 3% interest rate wouldn't that not matter because everyone gets stress tested at 5%?


The stress test for 5% is one metric that is used. Some open LOCs to get the down payment which is lower as a % of total mortgage than many years ago but definitely higher in dollar amount. Many first time home buyers also have other debt which will push them into the range where payments and COL exceed the threshold. Interest rates go up (for both lending and savings) to curb inflation. This means the cost of all other goods will be increasing at the same time or after the mortgage. As long as property values increase faster than Total debt ratio nobody sees the problem as long as debt servicing ratio is met.

I know we were preapproved for almost double in what we were seeking for our mortgage. That was over a decade ago so some metrics may have changed but to be the lenders role is to keep us as indebted without going into default. Competition from other lenders result in the variances mentioned by @nathan79 so that they can push the boundaries. As long as defaults are kept below a certain limit the lenders are operating within bounds.


----------



## MrBlackhill

MrMatt said:


> I think the amounts they let you borrow are almost predatory.


I don't think so. The issue is most likely that people don't know how to manage their finances and spend way too much. When we got our mortgage, we were at the very limit of that stress-test. If our mortgage rate was at that stress-test level of 5.25%, we would have to pay $700/month more. Turns out we could definitely pay that, even though we were accepted at the limit of the stress-test.

I think there's more income risk than rate hike risk. What if I lose my job? What if the next job I find offers a salary 10% lower? Or even 20% lower? The income risk isn't stress-tested.


----------



## MrMatt

MrBlackhill said:


> I don't think so. The issue is most likely that people don't know how to manage their finances and spend way too much. When we got our mortgage, we were at the very limit of that stress-test. If our mortgage rate was at that stress-test level of 5.25%, we would have to pay $700/month more. Turns out we could definitely pay that, even though we were accepted at the limit of the stress-test.
> 
> I think there's more income risk than rate hike risk. What if I lose my job? What if the next job I find offers a salary 10% lower? Or even 20% lower? The income risk isn't stress-tested.


Well, from most of what I have seen the max allowable mortgage is beyond most peoples affordability. 
I'm sure there are cases where people can actually afford the max loan amount, but I think in most cases they can't.

I do agree that most people don't know how to manage their finances. I really think some basic financial literacy should be taught, right up there with reading, and some sort of media awareness education. (which they are starting to do now)


----------



## Juggernaut92

nathan79 said:


> I'm hearing that about half of buyers are failing the stress test but still being approved under what is called a variance -- which is basically alternative criteria to determine if they have the means to afford the mortgage. This is all supposedly legit, but it sounds very opaque to me.


I see. So the stress test is not necessarily an absolute thing but more of a standard that most people should measure up against.


OptsyEagle said:


> Too many people will just generate more debt by using credit cards and LOC to pay for the other items they will still want, that they have become sort of dependent on.
> 2) If rates keep going up they tend to create a slow down in economic growth, that can create the unemployment necessary for all these problems to hit the fan at the same time. All stress tests assume a continuation of the family income.
> 
> That is the real problem. The stress test on a higher amount is meant to give some slack to account for this but it has yet to be tested if it will be enough.


I see. Thanks for breaking that down. Never thought of the cycle where interest rate would go up and the economy slows down a bit and then unemployment could result and then hurt people who have high mortgages.


MrMatt said:


> For a Gross income of 60k, they say you can qualify for a mortgage of $200k, and payment of $1163.21/month
> With their assumptions that's $1963.21/month in total debt. (+ heat & property tax)
> 
> Not bad, right?
> But your after tax income is $3816/month, so you're left with $1850/month for everything else.
> Electricity, car insurance, water bill, internet/cell phones, (another 300-400) leaving you with $1450/month, or about $300/week
> The average family spends $220wk on food. How much does a week of groceries cost in Canada? We crunched the numbers - National | Globalnews.ca
> 
> This leaves $80 for gas, clothing and all the other incidentals. Let alone any savings.
> 
> I think most people have trouble affording the maximum mortgage they legally qualify for.
> 
> As Optsy says, you have to apply and see what kind of mortgage they'd offer you, but you could run the government calculator, then see how it fits into your budget. I think the amounts they let you borrow are almost predatory.


Interesting. Thanks for the links. Did not know that they over mortgaged people. Will look into this. That income/math may work for a single person but definitely not to raise a family.


londoncalling said:


> The stress test for 5% is one metric that is used. Some open LOCs to get the down payment which is lower as a % of total mortgage than many years ago but definitely higher in dollar amount. Many first time home buyers also have other debt which will push them into the range where payments and COL exceed the threshold. Interest rates go up (for both lending and savings) to curb inflation. This means the cost of all other goods will be increasing at the same time or after the mortgage. As long as property values increase faster than Total debt ratio nobody sees the problem as long as debt servicing ratio is met.
> 
> I know we were preapproved for almost double in what we were seeking for our mortgage. That was over a decade ago so some metrics may have changed but to be the lenders role is to keep us as indebted without going into default. Competition from other lenders result in the variances mentioned by @nathan79 so that they can push the boundaries. As long as defaults are kept below a certain limit the lenders are operating within bounds.


Interesting. Never knew that people actually took out LOC in order to get a down payment. That sounds quite risky. what is COL? Never saw that relationship either with the home value increasing vs debt. Sounds risky to bank on your home price increasing in order to service your debt.


MrBlackhill said:


> I don't think so. The issue is most likely that people don't know how to manage their finances and spend way too much. When we got our mortgage, we were at the very limit of that stress-test. If our mortgage rate was at that stress-test level of 5.25%, we would have to pay $700/month more. Turns out we could definitely pay that, even though we were accepted at the limit of the stress-test.
> 
> I think there's more income risk than rate hike risk. What if I lose my job? What if the next job I find offers a salary 10% lower? Or even 20% lower? The income risk isn't stress-tested.


Good point. I do see that managing personal finance is an important component. maybe before you could not manage your finance too well and still get a home but I do not think that is possible anymore. That is a good point about the job as that relies on future stability.


----------



## londoncalling

Juggernaut92 said:


> I see. So the stress test is not necessarily an absolute thing but more of a standard that most people should measure up against.
> 
> I see. Thanks for breaking that down. Never thought of the cycle where interest rate would go up and the economy slows down a bit and then unemployment could result and then hurt people who have high mortgages.
> 
> Interesting. Thanks for the links. Did not know that they over mortgaged people. Will look into this. That income/math may work for a single person but definitely not to raise a family.
> 
> Interesting. Never knew that people actually took out LOC in order to get a down payment. That sounds quite risky. what is COL? Never saw that relationship either with the home value increasing vs debt. Sounds risky to bank on your home price increasing in order to service your debt.
> 
> Good point. I do see that managing personal finance is an important component. maybe before you could not manage your finance too well and still get a home but I do not think that is possible anymore. That is a good point about the job as that relies on future stability.


Cost of Living


----------



## james4beach

This is an interesting recent Nanos poll asking Canadians whether they are more worried about rising prices, or higher interest rates.

87% of Canadians said they are more worried about the current pace of rising prices than higher interest rates.

Kind of surprising that most Canadians actually support higher interest rates. This will encourage the Bank of Canada to follow through with rate hikes, I hope.


----------



## MrMatt

Juggernaut92 said:


> Interesting. Never knew that people actually took out LOC in order to get a down payment. That sounds quite risky.


Technically it's not appropriate or legal, not sure which honestly.
I know I got a callback from "compliance", when I put money from a LOC into mutual funds, so I think that someone is watching this a bit more closely.



> what is COL? Never saw that relationship either with the home value increasing vs debt. Sounds risky to bank on your home price increasing in order to service your debt.


Cost of Living.
Inflation is much higher than wage growth.
The one nice thing is with the high inflation I think my city property taxes are going up by less than inflation for the first time in decades.


----------



## MrMatt

james4beach said:


> This is an interesting recent Nanos poll asking Canadians whether they are more worried about rising prices, or higher interest rates.
> 
> 87% of Canadians said they are more worried about the current pace of rising prices than higher interest rates.
> 
> Kind of surprising that most Canadians actually support higher interest rates. This will encourage the Bank of Canada to follow through with rate hikes, I hope.


Even though I agree, that number is so astonishingly high I think they didn't understand the question.

But I think it shows how offside with the public opinion Trudeau is, while ordinary people are concerned about inflation and cost of living, "monetary policy isn't a priority"

I really hope O'Toole can get in, I don't like him either, but he seems slightly less out of touch than Trudeau.


----------



## james4beach

MrMatt said:


> Even though I agree, that number is so astonishingly high I think they didn't understand the question.


I agree, it doesn't seem like they understood the question.

They probably have no idea what will happen to their home prices if interest rates go up. They probably haven't thought through the various consequences.


----------



## james4beach

Strong employment data in the US has tilted the odds even more towards Federal Reserve tightening.

Bloomberg says that interest rate derivatives show a 90% chance of a Fed hike in March. On the other hand, these predictions can change dramatically week to week.


----------



## sags

I think people are mixing up fiscal and monetary policy.

Governments look after fiscal policy. The BOC looks after monetary policy. It is best they are independent from each other.


----------



## james4beach

Economists expect the Bank of Canada to raise rates next week, January 26

Interest rate derivatives suggest 70% probability of a rate hike in a week.









Economists Say Bank of Canada to Begin Hiking Rates Next Week - BNN Bloomberg


Canadian banks are bringing forward their forecasts for interest rate hikes to as early as next week, amid growing evidence the economy is hitting limits and inflation pressures are rising.




www.bnnbloomberg.ca


----------



## Money172375

Juggernaut92 said:


> I see. Now I am curious. Would you say this is the case because your financial situation changed? (lower income job than before etc).
> 
> I do not have a mortgage but I do see how if people were stress tested for 5% but only actually pay 2% interest on their mortgage then it would make sense to just spend that 3% difference on other items.
> 
> 
> Can you elaborate on this? If banks are charging 2% interest rate currently and overnight interest rates raise and then banks are now charging 3% interest rate wouldn't that not matter because everyone gets stress tested at 5%?


There’s a little buffer in how a lot of variable mortages’ payments are structured. A few percentage point rise in rates will likely not mean an increase in payments for people with 5 year variable mortgages. The payment stays the same but the amount going to principal decreases and the amount going to interest increases. It’s the people with floating LOCs and those who are up for renewal that could see higher payments.


----------



## james4beach

Anyone think there could be fireworks tomorrow?

BoC is likely to raise rates in the morning, and then a few hours later, the Federal Reserve releases minutes which will show what they think about rate hikes and ending QE.

I think the USD/CAD exchange rate could also swing around tomorrow as both events happen.


----------



## londoncalling

I hope the BOC raises 25 bps but am not confident they will do so. The Fed will talk about March hikes and cutting back QE. It seems that we are so hooked on low rates that we have to prepare everyone for a decade that higher rates will be coming to the point nobody believes it any more. End result is that we have to prepare consumers for 3 months and endure that fear over a 1/4 point. Let's get it done already so we can all see that the world will keep turning in spite of a small hike.


----------



## KaeJS

I don't think the BoC will raise until after the US does.
But of course, I could be wrong. Hopefully I am not, as I have been buying the dips.


----------



## Beaver101

londoncalling said:


> I hope the BOC raises 25 bps but am not confident they will do so. The Fed will talk about March hikes and cutting back QE. It seems that we are so hooked on low rates that we have to prepare everyone for a decade that higher rates will be coming to the point nobody believes it any more. End result is that we have to prepare consumers for 3 months and endure that fear over a 1/4 point. Let's get it done already so we can all see that the world will keep turning in spite of a small hike.


 ... I say bring it on instead of enduring the "to-hike or not-to-hike" mystery which has been holding for how long?


----------



## MrBlackhill

Announcement: No change in Policy Rate for Canada









Bank of Canada maintains policy rate, removes exceptional forward guidance


The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ %, with the Bank Rate at ½ % and the deposit rate at ¼ %.




www.bankofcanada.ca


----------



## londoncalling

Gutless B0fC. So much for having policy guidance to control inflation. As suspected by most it will wait for the US to move first.


----------



## james4beach

They chickened out! Unbelievable!!

Shameful.


----------



## newfoundlander61

I was sure they were going to raise today, hmmm surprised.


----------



## james4beach

newfoundlander61 said:


> I was sure they were going to raise today, hmmm surprised.


The market was pricing 70% to 75% chance of rate hike this morning. This shows how wrong the market can be.


----------



## MrBlackhill

Blame is on supply chain.










Projections that inflation will ease out by the end of 2023.











https://static.bankofcanada.ca/uploads/pdf/mpr-2022-01-26.pdf


----------



## Beaver101

Just pray that when the BOC decides to raise the rate, it will not be a whopping say 1% ... aka accumulative.


----------



## MrMike

Bank of Canada holds benchmark interest rate steady again


https://www.cbc.ca/news/business/bank-of-canada-rate-decision-1.6328104


----------



## MrBlackhill

MrMike said:


> Bank of Canada holds benchmark interest rate steady again
> 
> 
> https://www.cbc.ca/news/business/bank-of-canada-rate-decision-1.6328104


You're a bit late on the news.


----------



## james4beach

I wonder if this is a new tactic in central bank policy: using words (instead of actions) to implement policy.

Maybe they'll just keep warning that tightening is coming, wagging a finger and saying rates could skyrocket. Perhaps the idea is that this fear is enough to restrain markets.


----------



## KaeJS

As I said upthread, I'm really not surprised.

They won't do anything until America does. Inflation is lower (ha, not really!) in Canada than America, so the BoC will wait until March. When the US raises, we will raise.


----------



## diharv

I just knew that BOC wouldn't have the guts to be a leader in the world and do the right thing. As usual they will wait and follow the lead of the US, though not sure they will act on their words either.


----------



## m3s

james4beach said:


> I wonder if this is a new tactic in central bank policy: using words (instead of actions) to implement policy.
> 
> Maybe they'll just keep warning that tightening is coming, wagging a finger and saying rates could skyrocket. Perhaps the idea is that this fear is enough to restrain markets.


It's not new. Forward guidance has been around for a long time. What's new is it's all they have left

They don't really have any other choice. Rates have declined for decades and there's no way to reverse that trend now. They can't really go much lower either

The system is unsustainable and many have caught on



> In the U.S., the Fed's FOMC has used forward guidance as one of its major tools since the Great Recession.
> 
> Through the use of forward guidance, the FOMC has communicated its intent to keep interest rates low for as long as needed in order to improve credit availability and stimulate the economy. Similarly, Fed Chair Jerome Powell has communicated to the financial markets that the Fed will continue to support the U.S. economy until the effects of the global financial crisis have subsided.


----------



## diharv

londoncalling said:


> I hope the BOC raises 25 bps but am not confident they will do so. The Fed will talk about March hikes and cutting back QE. It seems that we are so hooked on low rates that we have to prepare everyone for a decade that higher rates will be coming to the point nobody believes it any more. End result is that we have to prepare consumers for 3 months and endure that fear over a 1/4 point. Let's get it done already so we can all see that the world will keep turning in spite of a small hike.


You called it bang on. When it comes down to it and the effect it would have had, a quarter point increase is insignificant in the grand scheme of things. But significant in the message it sends and the confidence it projects that they are serious about moving forward . His belief that inflation is going to basically take care if itself makes me wonder if someone well coiffed has been bending his ear.


----------



## Ukrainiandude

diharv said:


> I just knew that BOC wouldn't have the guts to be a leader in the world and do the right thing. As usual they will wait and follow the lead of the US, though not sure they will act on their words either.


I don’t think guts has to do with anything.
inflations hurts low and middle income families, those are not gonna finance political campaigns. Bank of Canada takes care of wealthy taxpayers who will sponsor political parties. Corruption 101.


----------



## Thal81

I'm so disappointed. Let's just kick that can down the road a little bit more while inflation continues to ravage our country.


----------



## Ukrainiandude

Thal81 said:


> I'm so disappointed. Let's just kick that can down the road a little bit more while inflation continues to ravage our country.


I don’t think 0.25% increase would make any difference on double digits inflation.


----------



## londoncalling

A .25% increase today would have been a start. The impact of an increase, no matter how small, takes time to work its way through the system. Everyone has been prepared for increasing rates and the message that has been sent is that Canadians have greater concerns over inflation than they do interest rate increases. The message I received today is that our economy is a house of cards where even an insignificant 25bps change would be too disruptive. Of course the market is happy to let the party continue. So far they have gotten the inflation prognosis wrong every step of the way. At least Carney tried to wean us off low rates in 2010 after the repeated cuts during the financial crisis.


----------



## Ukrainiandude

Experts have estimated that $43-$113 billion a year are laundered through Canada. “The problem of money-laundering in Canada and other corruption scandals have been headline news in recent years dragging down the perception of Canada as a clean country. This year’s disappointing results show the need to take concrete action to restore Canada’s reputation.” said TI Canada Executive Director, James Cohen.

corrupted country. Corrupted bank of Canada. Outcome was expected. No significant rate changes will happen in the foreseeable future. Enjoy your 6k per quarter properly taxes.


----------



## Covariance

March 2 it is then. In the press conference they tried to emphasize that rates are going up in a series of steps. 

On to the Fed this afternoon...


----------



## Eclectic21

Ukrainiandude said:


> ... Enjoy your 6k per quarter properly taxes.


That's what you figure is coming down the pipe?

So far, I have yet to pay $6K _a year_, in property taxes. 
'Course, I'm not in the GTA or GVA.


Cheers


----------



## Ukrainiandude

Eclectic21 said:


> That's what you figure is coming down the pipe?


2021 Residential Property Tax Rate:
2.774400 %

2021 Residential Property Tax Rate:
3.218900 %


----------



## Covariance

Covariance said:


> March 2 it is then. In the press conference they tried to emphasize that rates are going up in a series of steps.
> 
> On to the Fed this afternoon...


And that’s a wrap. US Fed in March as well.


----------



## wayward__son

At this point it would be unimaginably pathetic for the fed not to raise in March, but I am still preparing for that possibility. Plenty of time between now and then for some type of ‘market dysfunction’ to force a pivot. Either way, negative real rates are still on the menu. Inflation transfers wealth from lenders/savers to borrowers. The borrowers are bigger and I cannot see them losing. For us small fry savers, there will be no apologies, no compensation for the transfer. All we can do is try to protect ourselves as much as we can.


----------



## Ukrainiandude

wayward__son said:


> All we can do is try to protect ourselves as much as we can.


Physical gold used to perform this function. But with widespread of paper gold ETFs that’s no longer a case. it seems.


----------



## m3s

wayward__son said:


> For us small fry savers, there will be no apologies, no compensation for the transfer. All we can do is try to protect ourselves as much as we can.


Savers have been punished for a long time. Low rates benefit those with debt and assets

If ya can't beat em join em. Take on debt and/or inflated assets


----------



## Ukrainiandude

If only people could switch to trades using gold and silver coins (plastic casing to protect) and the government with bank of Canada can shove down plastic bills into their throats.


----------



## MrBlackhill

wayward__son said:


> Inflation transfers wealth from lenders/savers to borrowers.


Yup, I bought a property in 2019 on a fixed rate mortgage because I was a bit stressed because I was at maximum leverage. When I saw the crash and the rates fall, I told myself never again will I take a fixed rate.

But then, aside from that bad decision, I thought... Since 2019 only, my property increased by 20%+ in value. Inflation is higher than my mortgage rate. I'm basically getting paid to own a mortgage, because due to inflation my debt is worth -5% less, or even less!


----------



## Eclectic21

Ukrainiandude said:


> 2021 Residential Property Tax Rate:
> 2.774400 %
> 
> 2021 Residential Property Tax Rate:
> 3.218900 %


Hmmm ... your juristiction raised property taxes part-way through 2021?

I'm still wondering where the $24K a year property taxes are (and what property they are on).


Cheers


----------



## Ukrainiandude

The rivers of money poured into the markets by the US Federal Reserve will stop in the coming months and then reverse. The American central bank plans to start the process of reducing its balance sheet, de facto withdrawing dollars "printed" after the start of the pandemic.

Since March 2020, the Fed has pumped $4.4 trillion into the system by buying up assets including U.S. Treasury and mortgage bonds. The Fed's balance sheet reached a record $8.8 trillion, and the process of replenishing it continues now, albeit at a declining rate: $90 billion in December, $60 billion in January, $30 billion in February.

In March, the "printing press" of the Fed will stop, and then - with some lag - operations will be reversed. Quantitative tightening (QT) will begin after the start of the interest rate hike cycle, the regulator announced in a release following a meeting of the Open Market Committee on Wednesday.

The balance sheet cut will be "significant," Fed chief Jerome Paull warned at a press conference. He added that the US economy has shown strength and no longer needs strong support from the Fed.

The Fed futures market has booked four increases in 2022. But given inflation, which accelerated to 7% for the first time since the early 1980s, it is possible that there will be more of them, or the first step - in March - will shift the cost of loans immediately by 50 bp. up, ING analysts write.

As for the reduction of the balance sheet, it is likely to begin in the summer, the bank believes. Goldman Sachs predicts that the total volume of QT will be $2-2.5 trillion. In other words, half of the “printed” dollar supply will be withdrawn from the system.

Moreover, the speed of these withdrawals will be significant - up to $ 100 billion per month or more, which will allow the process to be completed in two to three years, GS believes.

However, the Fed could start with modest transactions of up to $20 billion a month, and then increase it to $90 billion, ING predicts. According to him, the Fed's balance sheet will decrease to $6 trillion by the mid-2020s and will be equal to 20% of US GDP (against 36% of GDP now).

The question remains how decisively the Fed will act. The soft option is to simply wait until the securities purchased on the balance sheet expire. However, in this case, it will be impossible to reduce the balance sheet by more than $60-70 billion in most months, Nomura estimates.

The hard scenario is the sale of assets from the Fed's balance sheet to the market.

The Fed could raise rates four times this year and the same number next, according to ING. This will make the tightening cycle the sharpest since 2004, when the US Central Bank increased the cost of borrowing 16 times over a 2-year period.

The result will be a strengthening of the dollar, which may continue throughout the current year, according to ING. The index of the American currency at the end of the Fed meeting has already updated its maximum for six months (97.2 points), and the yields of US government bonds jumped (1.69% on 5-year securities, 1.87% on 10-year ones).

As for the reduction in balance, it may even become unprecedented in history. Over the past 20 years, the Fed has implemented quantitative tightening only once, in 2017-19, totaling $700 billion.

Then the head of the Fed came under fire from former President Donald Trump, who accused Powell of incompetence and even considered firing him. This time, Powell is again in danger of being a scapegoat: the US economy is slowing, and Biden's ratings are updating lows (41%, according to a January Pew Research poll).


----------



## m3s

This is all just "forward guidance"

Basically JPow confirmed that they will meet again to talk again about meeting again to talk in the near future

Thanks JPow


----------



## Covariance

Ukrainiandude said:


> The rivers of money poured into the markets by the US Federal Reserve will stop in the coming months and then reverse. The American central bank plans to start the process of reducing its balance sheet, de facto withdrawing dollars "printed" after the start of the pandemic.
> 
> Since March 2020, the Fed has pumped $4.4 trillion into the system by buying up assets including U.S. Treasury and mortgage bonds. The Fed's balance sheet reached a record $8.8 trillion, and the process of replenishing it continues now, albeit at a declining rate: $90 billion in December, $60 billion in January, $30 billion in February.
> 
> In March, the "printing press" of the Fed will stop, and then - with some lag - operations will be reversed. Quantitative tightening (QT) will begin after the start of the interest rate hike cycle, the regulator announced in a release following a meeting of the Open Market Committee on Wednesday.
> 
> The balance sheet cut will be "significant," Fed chief Jerome Paull warned at a press conference. He added that the US economy has shown strength and no longer needs strong support from the Fed.
> 
> The Fed futures market has booked four increases in 2022. But given inflation, which accelerated to 7% for the first time since the early 1980s, it is possible that there will be more of them, or the first step - in March - will shift the cost of loans immediately by 50 bp. up, ING analysts write.
> 
> As for the reduction of the balance sheet, it is likely to begin in the summer, the bank believes. Goldman Sachs predicts that the total volume of QT will be $2-2.5 trillion. In other words, half of the “printed” dollar supply will be withdrawn from the system.
> 
> Moreover, the speed of these withdrawals will be significant - up to $ 100 billion per month or more, which will allow the process to be completed in two to three years, GS believes.
> 
> However, the Fed could start with modest transactions of up to $20 billion a month, and then increase it to $90 billion, ING predicts. According to him, the Fed's balance sheet will decrease to $6 trillion by the mid-2020s and will be equal to 20% of US GDP (against 36% of GDP now).
> 
> The question remains how decisively the Fed will act. The soft option is to simply wait until the securities purchased on the balance sheet expire. However, in this case, it will be impossible to reduce the balance sheet by more than $60-70 billion in most months, Nomura estimates.
> 
> The hard scenario is the sale of assets from the Fed's balance sheet to the market.
> 
> The Fed could raise rates four times this year and the same number next, according to ING. This will make the tightening cycle the sharpest since 2004, when the US Central Bank increased the cost of borrowing 16 times over a 2-year period.
> 
> The result will be a strengthening of the dollar, which may continue throughout the current year, according to ING. The index of the American currency at the end of the Fed meeting has already updated its maximum for six months (97.2 points), and the yields of US government bonds jumped (1.69% on 5-year securities, 1.87% on 10-year ones).
> 
> As for the reduction in balance, it may even become unprecedented in history. Over the past 20 years, the Fed has implemented quantitative tightening only once, in 2017-19, totaling $700 billion.
> 
> Then the head of the Fed came under fire from former President Donald Trump, who accused Powell of incompetence and even considered firing him. This time, Powell is again in danger of being a scapegoat: the US economy is slowing, and Biden's ratings are updating lows (41%, according to a January Pew Research poll).


Good summary of the events and opinion of some. I doubt it will unfold as such. As much as the Fed talked tough, the way people are extrapolating this is rather extreme. It's almost as thou they want to out do each other on how aggressive the Fed will tighten. The Central Bankers are not idiots. Agreed they will raise their rates but I don't see them going crazy. They know as we do that supply is the issue. And as supply improves they want the demand there to keep the economy humming. Sequential raises up to 1% sometime this year, and toward 2 next year.


----------



## Ukrainiandude

Covariance said:


> The Central Bankers are not idiots.


This statement is arguable. They let the inflation to reach double digits in the first place. Then vehemently denied its existence and later called it transient.


----------



## m3s

Ukrainiandude said:


> This statement is arguable. They let the inflation to reach double digits in the first place. Then vehemently denied its existence and later called it transient.


They knew what they were doing though

Idiots took what they said for face value.. like they take fiat


----------



## sags

Rising home equity, growing retirement funds, fully funded pensions and healthcare plans.......how can people possibly think these are good results ?


----------



## KaeJS

sags said:


> Rising home equity, growing retirement funds, fully funded pensions and healthcare plans.......how can people possibly think these are good results ?


For those that have homes.
For those that have retirement funds.
For those that have pensions.


----------



## m3s

It's as if the central banks are full of boomers who look after what they see as most important

There needs to be an age cutoff or some kind of cognitive test. Give them a driving test at the same time

Let them central plan the local tee off times and pigeon food policy


----------



## AltaRed

I think central bankers pretty much know what they are doing. It is a delicate balance between taking the heat out of asset inflation without actually putting out the fire. Dampening of asset inflation results in slower net worth growth, which translates into feeling less wealthy, and thus lower consumer spend and cooling of inflation. It is so obvious in forums like this, i.e. the euphoria of stock market and real estate gains vs hunkering down when valuations go flat or trend down.

I really don't know about your 'obsession' about boomers but if it makes you feel bigger, have at it. Much of the wealth is still held by the pre-boomers who are currently 76 years of age or more. Boomers are currently 58-75 years of age.


----------



## wayward__son

sags said:


> Rising home equity, growing retirement funds, fully funded pensions and healthcare plans.......how can people possibly think these are good results ?


You forgot wages. Oh, did those not go up the same way? And now that inflation has made its way into actual goods in the real economy and the government can do nothing but capitulate, they are getting after it by tightening policy to crush demand, "get wages under control". Funny that. I didn't notice any of this concern among the political class as asset prices spent a decade inflating.

Periodic market crashes and corrections are important for those just starting to make their way in the world. Up only asset markets in societies with inflation targets (i.e., the currency is debased by decree) lock young wage earners out of the opportunity to save for the future. Their wages are paid in units that their society has agreed to debase over time, and assets never go on sale for them or even really reach a fair price except only rarely.

Volatility exists in nature. When volatility is suppressed, as central banks have done for political expedience (pulling returns from the future into the present through leverage priced by bureaucratic rather than free market means, for the benefit of some, at the expense of others), the volatility of life seems to disappear for a time, but I do not believe it is destroyed. It shifts and morphs, and lurks in the shadows, then later emerges and finds expression in other ways. There is social upheaval and generational conflict today that traces to money and how we've decided to price it in the era of the central bank.


----------



## Ukrainiandude

Covariance said:


> They know as we do that supply is the issue. And as supply improves they want the demand there to keep the economy humming. Sequential raises up to 1% sometime this year, and toward 2 next year.


why is this “supply issue”restricted to the USA and Canada? Or you mean uncontrollable money supply?
I don’t think voters who are low and middle class families will forget this “supply issue” on the next election. Biden and Justin T unlikely to get re-elected. Biden’s approval rates are historically low. No one gonna like politicians who basically did a money grab from everyone’s pockets.


----------



## sags

There wasn't any inflation since 2008 and wages have been stagnant for decades.

Recent government stimulus and central bank easing is not systemic and will be rolled back when deemed no longer necessary.

A little temporary inflation, caused by supply chain disruptions due to covid, is long overdue and needed for a healthy economy.

Wages will increase, cost of living increases raise government benefits, and the increases will remain after inflation has dropped back to low levels.

I wouldn't recommend learning economics from Pierre P, who apparently wanders around aimlessly asking central bankers what money is.


----------



## sags

If Pierre P and others rely on any college economics courses they might have taken for their understanding, it should be noted the Bank of Canada compiles a wide stream of data points and employs or consults with many economists holding degrees in economics, including those with Masters degrees and PHDs like the ones who taught those college courses that Pierre and others rely on for their knowledge.

What I see posted from Pierre P more typically aligns with high school household budgeting classes.


----------



## KaeJS

sags said:


> There wasn't any inflation since 2008 and wages have been stagnant for decades.
> 
> A little temporary inflation, caused by supply chain disruptions due to covid, is long overdue and needed for a healthy economy.
> 
> Wages will increase, cost of living increases raise government benefits, and the increases will remain after inflation has dropped back to low levels.
> 
> I wouldn't recommend learning economics from Pierre P, who apparently wanders around aimlessly asking central bankers what money is.


You can't be serious.


----------



## sags

By contrast to Opposition Finance critic Pierre who has limited knowledge and no experience, the Finance Minister Chrystia Freeland has an extensive education, is a Rhodes scholar, and posesses a wide background of experience and accomplishments in finance, trade, and economics. She has published books on finance and economics, and has given TED talks on various economic subject matter. She has negotiated global trade deals on Canada's behalf.

She is well qualified and would be welcomed to teach at Ivy League business schools like Harvard. I doubt Pierre would be similarly qualified to do so.

Pierre holds a Bachelor of Arts degree from the University of Calgary, so may not even be qualified to teach budgeting in elementary schools.


----------



## KaeJS

sags said:


> By contrast to Opposition Finance critic Pierre who has limited knowledge and no experience, the Finance Minister Chrystia Freeland has an extensive education, is a Rhodes scholar, and posesses a wide background of experience and accomplishments in finance, trade, and economics. She has published books on finance and economics, and has given TED talks on various economic subject matter. She has negotiated global trade deals on Canada's behalf.
> 
> She is well qualified and would be welcomed to teach at Ivy League business schools like Harvard. I doubt Pierre would be similarly qualified to do so.
> 
> Pierre holds a Bachelor of Arts degree from the University of Calgary, so may not even be qualified to teach budgeting in elementary schools.


Doesn't take a whole lot of education to realize the Canadian economic atmosphere is completely insane. But it takes common sense (something Pierre has) to do something about it and try to fix it.


----------



## m3s

sags said:


> There wasn't any inflation since 2008 and wages have been stagnant for decades.
> 
> Recent government stimulus and central bank easing is not systemic and will be rolled back when deemed no longer necessary.
> 
> A little temporary inflation, caused by supply chain disruptions due to covid, is long overdue and needed for a healthy economy.
> 
> Wages will increase, cost of living increases raise government benefits, and the increases will remain after inflation has dropped back to low levels.
> 
> I wouldn't recommend learning economics from Pierre P, who apparently wanders around aimlessly asking central bankers what money is.


It takes a lot of mental gymnastics to convince yourself of something so wrong

The truth so simple that you are blinding yourself with it


----------



## Covariance

England’s Central Bank raised rates again today. Two in a row after raising in December.


----------



## james4beach

Covariance said:


> England’s Central Bank raised rates again today. Two in a row after raising in December.


Kind of amazing to me, but good to see.

I'm still very disappointed that the BoC chickened out in January.


----------



## Covariance

Had a month end look at the trend on GoC and US treasuries. Here are some yields and observations for Canadas. Not a surprise to anyone I would guess. The first column is Friday Jan 7 and last column is last Friday. GoC Bonds 3, 5, 10 and 30 years.
3YR. 1.177 1.4530
5YR. 1.496. 1.7170
10YR 1.713. 1.8560
30YR 1.964. 2.1010

Observations:
1. level of curve has gone up, all tenors
2. slope has decreased (front of the curve has gone up more than the back end)
3. less curvature (butterfly spread)

For the most part this is consistent with what one would expect to have happening at this stage of business cycle and monetary policy.


----------



## MrBlackhill

Covariance said:


> slope has decreased (front of the curve has gone up more than the back end)


Preparing the next yield curve inversion.


----------



## Ponderling

Two weeks ago I sold off about 100k in XQB when it was back to flat from when I originally bought it. So far sitting in cash. Still have about 400K in AGG that is down 20K, Think I will sit in it and let it spit divvy's and hold my nose as it slides because there is the potential for us/cdn currency gains still.


----------



## james4beach

I'm starting to see some interesting yields within short term corporates.

IGM Financial, 2027/12/13, coupon=6.65%, YTM=3.08%
Brookfield, 2027/03/16, coupon=3.80%, YTM=3.04%
Brookfield, 2026/01/28, coupon=4.82%, YTM=2.93%

Unfortunately the Bank of Canada was a buyer of these bonds and manipulated their prices. Does anyone know if the BoC has dumped their corporate bonds yet?


----------



## Thal81

Man, I hope we don't see an inverted yield curve, but it seems inevitable that it will happen when the BoC increases the overnight rate. For the savvy people out there, can you explain to me what economic conditions would cause the long term yields to increase?


----------



## OptsyEagle

What I worry about, among many things, is that right now we have this ravaging level of inflation and with that we are here discussing what level of interest rates that may produce, going forward, as the Fed raises interest rates. We also know that the inflation, that is creating this environment was partially, if not totally, created by the printing of money by that same Federal Reserve and BOC.

Now we all mostly understand the process of printing money. The Fed. prints money and buys government bonds. The government and investors selling those bonds has the newly printed money and starts spending it on all the goods and services in the country...and drives up the price. What I worry about is the bond buying part of that equation or more, what happens when it stops. These governments, that were selling the bonds, were generating some pretty big and scary budget deficits. During covid they were mind boggling but even before they were outrageously large. What I am worried about precisely is "what is the equilibrium interest rate on government bonds that will properly discount the risk associated by such large budget deficits?"

So, in summary we will get higher rates from the inflation and the Fed raising interests rates but since we never had the chance to see if there was any risk pricing of those same bonds, since our Fed. was buying them up regardless of price, when they stop doing that, will that risk premium add an additional interest level to these bonds. So where inflation might drive the 10 yr to 3% or 4%, the budget deficits, without a Fed to intervene may add a risk premium of another 2% or 3%.

Now we are talking about some nasty recession creating interest rates indeed.


----------



## Covariance

Thal81 said:


> Man, I hope we don't see an inverted yield curve, but it seems inevitable that it will happen when the BoC increases the overnight rate. For the savvy people out there, can you explain to me what economic conditions would cause the long term yields to increase?


1. Expectations of inflation higher than those currently priced in. The market has discounted where we are in the business cycle, and expected; GDP growth, inflation, central bank action. A change in view on long term inflation would demand higher long term yields in compensation.
2. Supply, demand imbalance in bond market. When US Federal Reserve, Bank of Canada start to reduce the amount of bonds they own, at those junctures stable bond prices will be dependent on the presence of other buyers. If investors views of respective economies, inflation, real return are not compelling they will not buy until the prices drop/rates rise to favourable levels.


----------



## m3s

Thal81 said:


> For the savvy people out there, can you explain to me what economic conditions would cause the long term yields to increase?


From some recent podcast interviews of people savvier than I

The Fed would attempt Yield Curve Control if the rates start to raise because otherwise there is too much government default risk

Bond investors are punished with negative real returns at best. We can look to Japan for an example


----------



## james4beach

Canada added more than 2x the number of jobs expected by economists. The economy is roaring. The unemployment rate is down to 5.5%, the first time the unemployment rate is below the start of the COVID pandemic.

*The number of hours worked has exceeded the pre COVID level, and has also hit a new all time high.*

With a booming economy, the Bank of Canada should have little excuse to not raise interest rates further, maybe?









You're hired! Canada added 336,600 jobs in Feb., crushing estimates - BNN Bloomberg


Canada’s labour market blew past expectations last month after the nation lifted COVID-19 restrictions meant to contain the spread of the omicron variant.




www.bnnbloomberg.ca


----------



## Beaver101

^ I would read that article with a grain of salt since it didn't say what kind of "jobs" were they other than artificial optimistic numbers spruce-up.

Maybe we can give a headsup thanks to the Ontario government on proposing a $15(?) wage minimum for food delivery "gig workers" (eg). LMAO.

_



... Full time employment was up 121,500 jobs in February, while part-time work rose by 215,100 positions. Gains in full-time work more than offset January losses, while part-time growth erased cumulative losses sustained over the previous two months. ime employment was up 121,500 jobs in February, while part-time work rose by 215,100 positions. Gains in full-time work more than offset January losses, while part-time growth erased cumulative losses sustained over the previous two months. ...

Click to expand...

 _
Don't disagree about this will be a good excuse for jacking up interest rates. Going to go up -hand in hand with rising inflation regardless. How long has it been since interest rates were kept artificially low too - a decade? Will do wonders for the hot-RE-flipping market too. LMAOAgain.


----------



## james4beach

Beaver101 said:


> ^ I would read that article with a grain of salt since it didn't say what kind of "jobs" were they other than artificial optimistic numbers spruce-up.


That's a good point. But nevertheless, "hours worked" has surged.

Unfortunately all this gig economy stuff, which I warned about long ago, is flooding the country with many low quality jobs. We need a serious unionization effort to help protect these workers from severe exploitation by Silicon Valley companies.

We need much more government regulation to help protect workers from this new form of exploitation by Silicon Valley.


----------



## Covariance

Next BoC meeting is April 13; hard circle 25bps and start of QT.

You may recall last Oct they stopped growing their balance sheet (ended QE). QT begins when they stop reinvesting proceeds from maturing bonds and start to reduce their holdings (balance sheet). Expect a measured, gradual approach to the unwinding.


----------



## Covariance

US Fed raised by 1/4 percent today to a range of 0.25 to 0.5 %

They project additional increases to reach 1.9% (midpoint of range) by year end.

Quantitative tapering (QT) to start at a future meeting. (In other words when they will start to reduce their balance sheet is tbd. But coming soon)


----------



## scorpion_ca

10 Years Treasury Yield has increased to 2.24%....bull market is going to downhill.....good for those who are in accumulation stage.


----------



## james4beach

scorpion_ca said:


> 10 Years Treasury Yield has increased to 2.24%....bull market is going to downhill.....good for those who are in accumulation stage.


Yeah and the Canadian 10 year is about the same. Perhaps more importantly the 5 year bond yields have gone up dramatically.

During 2020, the 5 year yield was only 0.30% and today it's 2.2% so an increase of nearly 200 basis points! Many business financing costs are tied to the 5 year, so businesses will very soon start feeling pressures from higher borrowing costs.

My guess is that we're entering a bear market in stocks for a few years. Might want to make sure you hold enough bonds & GICs to weather the storm.


----------



## bigmoneytalks

james4beach said:


> Yeah and the Canadian 10 year is about the same. Perhaps more importantly the 5 year bond yields have gone up dramatically.
> 
> During 2020, the 5 year yield was only 0.30% and today it's 2.2% so an increase of nearly 200 basis points! Many business financing costs are tied to the 5 year, so businesses will very soon start feeling pressures from higher borrowing costs.
> 
> My guess is that we're entering a bear market in stocks for a few years. Might want to make sure you hold enough bonds & GICs to weather the storm.


Bear markets last about 1-2 years. Longest bear market was the great depression. Bring it on... buying opportunity for those with long time horizons


----------



## james4beach

bigmoneytalks said:


> Bear markets last about 1-2 years. Longest bear market was the great depression. Bring it on... buying opportunity for those with long time horizons


Yeah, they're great for shaking out all the "weak hands".

Bear markets tend to destroy the greedy, and destroy those who were using a bad strategy and simply got lucky. In good times like 2020-2021, everyone was a winner, no matter what they did.


----------



## MarcoE

james4beach said:


> Bear markets tend to destroy the greedy, and destroy those who were using a bad strategy and simply got lucky. In good times like 2020-2021, everyone was a winner, no matter what they did.


As Buffet said, "Only when the tide goes out do you discover who's been swimming naked."


----------



## james4beach

MarcoE said:


> As Buffet said, "Only when the tide goes out do you discover who's been swimming naked."


It's a great quote, and I've come to see it more with experience. The last few years I've been working around venture capital people. They've been throwing around tons of money, for a while almost any tech entrepreneur with a pulse was getting funding.

Once that money dries up, everything changes.


----------



## doctrine

Interest rates are up again. 2.5% on a 5 year GoC, which is a 10+ year high. 5 year fixed mortgages are commonly being offered at 3.5% now. Those will be going up though. 4%? How does the Canadian real estate sector look with average house prices at $850,000 and mortgage interest rates at 4%? Buyers would also have to qualify at 6%. Maybe no impact? 

Those are some pretty hefty payments...I believe that anyone thinking that 10 year high in interest rates plus record Canadian housing prices is going to be situation normal, is going to be in for a lesson in supply and demand economics.

What if interest rates rise another 0.5% to 1%, that doesn't seem impossible to me. What does buying a $850,000 house at 5% interest look like for the average Canadian, qualifying at 7%?


----------



## james4beach

doctrine said:


> What if interest rates rise another 0.5% to 1%, that doesn't seem impossible to me. What does buying a $850,000 house at 5% interest look like for the average Canadian, qualifying at 7%?


It's going to tank the market if it keeps going like this. Bring it on.

But so far the BoC has only raised 0.25%. They really plan to raise another 2%? Sure... go for it guys.


----------



## londoncalling

I took an opportunity to look at my mortgage and renewal options last night, Here is what I found. Current rates are only .2% higher than our last renewal about 3.5 years ago. I have enough semi liquid cash (accessible in 6 months) to eliminate the mortgage. The break fee does not make financial sense to eliminate the mortgage before end of term. I can make lump sum payments and increase the biweekly payment (as I have done every year since the original mortgage) in 2022 and again in 2023 if I so choose. I could have chose not to make these extra payments and put that money into the stock market likely generating a better return over that same time period. When we originally looked into financing for our first home the lenders wanted to give us way more than we were seeking (almost double). We declined and opted for a home that met our needs at the time and could meet our needs in the future. Home prices have gone up higher than inflation increasing the value. Will they continue to do so is unknown but my guess is at some point they may not. Over a longer period of time they will likely meet or exceed inflation. For us it doesn't matter, as if we were to sell this house we would need another. As we likely would not be changing cities it is probably a moot point. If rates are significantly higher in 18 months we will likely eliminate the mortgage.

Although I am watching interest rates, I am not concerned as I put together a plan that addressed a lot of the risks and concerns around what can happen in a rising interest rate environment. a Interest rates matter to those who use real estate as an investment vehicle and those that are looking to get into the market. It also matters to those who hold bonds and bond funds or mess with their GIC ladders. There seems to be a lot more concern about the potential hikes that are to come than the last time rates were increased (Interest rates went up 1% in 2017-8). I can sympathize with those that have seen home prices escalate to the current levels. I would have been better to buy my first house 5 years before I did but was told prices were way above normal market and that they would fall to a more reasonable level. The reality is one should buy when they can reasonably afford to do so. 









I doubt the fed will want to be responsible for a major real estate correction and most people should be able to handle another 100-125 bps. It may be a good thing to squeeze out those that have overleveraged for the good of the entire market. The government won't allow rates to climb too high nor let real estate prices drop too much before they intervene. Have people overextended themselves more than they did in 2017? Was there the same level of concern in 2017? What is different now compared to then? I have a few thoughts but this post is already longer than I intended. Perhaps it is time for savers to be rewarded with higher rates. They certainly have been patient.


----------



## AltaRed

You need to look earlier than the table in your reference to the graph further down the page for the period since 1934. As late as Nov 2007, the overnight rate was 4.5% and it never fell below 2% since the 1950s. I am not suggesting we will have double digit overnight rates like we did in the 1980s but don't think the rates could not climb to 4-5% which is the point and rationale for stress test rates for qualification. Homeowners having to pay 50+% more on their monthly mortgage payments will be hard pressed to have much cash flow for any discretionary goods and services.


----------



## Covariance

Further to @AltaRed comments. I would use extreme caution using the last tightening cycle as a template this go around. In that last cycle inflation was a non event. And, in hindsight it all looks so orderly but in the actual course of events is anything but.


----------



## AltaRed

Covariance said:


> Further to @AltaRed comments. I would use extreme caution using the last tightening cycle as a template this go around. In that last cycle inflation was a non event. And, in hindsight it all looks so orderly but in the actual course of events is anything but.


A key point in the commentary for 1991-2008 is the last statement "_The inflation-target rate was introduced at the beginning of this period_." Overnight rates decreased as inflation was brought under control and the overnight rate tool has been used to manage CPI since that time. The experience of the '70s and '80s was enough for central banks to make inflation fighting a key tenet of their watch.

While both the Fed and BoC have now added things like GDP growth and employment to their inflation fighting mandate (changing to a more flexible 5 year rolling average 2-3% inflation rate), it would be naive and careless to assume central banks won't jack up overnight rates to 4-5%, or as needed, to get current troublesome inflation whack-a-moled back into submission. My view is we are likely headed for a mild(?) recession within 12 months as the banks have to become more ruthless.


----------



## doctrine

AltaRed said:


> While both the Fed and BoC have now added things like GDP growth and employment to their inflation fighting mandate (changing to a more flexible 5 year rolling average 2-3% inflation rate), it would be naive and careless to assume central banks won't jack up overnight rates to 4-5%, or as needed, to get current troublesome inflation whack-a-moled back into submission. My view is we are likely headed for a mild(?) recession within 12 months as the banks have to become more ruthless.


Adding not just full employment but an attempt to favour wages of the poor into the central bank mandate in 2020 and 2021 was a big mistake, in my opinion, one that is will go down in history for its stupidity. It was a radical experiment done specifically for social and arguably political reasons that aligned with the elected governments - on the ridiculous assumption that they could stoke wage inflation that would benefit the poor over the rich. And it was done simultaneously by the US and Canada. No one should forget this. And only then they followed that up by almost 2 years of denial of inflation "it's just transitory". And now we have 30 year high inflation and 0.50% interest rates and they have lost control. Now it's just a question of how fast they react to bring the system under control, now that the problem is recognized, and I haven't heard of the social mandate in quite a few months now. "Oops".


----------



## wayward__son

doctrine said:


> Adding not just full employment but an attempt to favour wages of the poor into the central bank mandate in 2020 and 2021 was a big mistake, in my opinion, one that is will go down in history for its stupidity. It was a radical experiment done specifically for social and arguably political reasons that aligned with the elected governments - on the ridiculous assumption that they could stoke wage inflation that would benefit the poor over the rich. And it was done simultaneously by the US and Canada. No one should forget this. And only then they followed that up by almost 2 years of denial of inflation "it's just transitory". And now we have 30 year high inflation and 0.50% interest rates and they have lost control. Now it's just a question of how fast they react to bring the system under control, now that the problem is recognized, and I haven't heard of the social mandate in quite a few months now. "Oops".


I’m not following this. They ran loose policy which boosts stock prices (and other assets) — this is juice for stock based executive comp, not the hourly wages of the stiff who bags your groceries.


----------



## james4beach

AltaRed said:


> While both the Fed and BoC have now added things like GDP growth and employment to their inflation fighting mandate (changing to a more flexible 5 year rolling average 2-3% inflation rate), it would be naive and careless to assume central banks won't jack up overnight rates to 4-5%, or as needed, to get current troublesome inflation whack-a-moled back into submission. My view is we are likely headed for a mild(?) recession within 12 months as the banks have to become more ruthless.


I agree it's possible that they could take the overnight rate to 5% but I really think it will bring a severe recession. Corporations and consumers are both highly dependent on cheap borrowing. Nobody has seen rates like those in a very long time and I think business will grind to a halt.

This is a very interesting situation. Besides, if inflation is largely due to supply chain problems, raising rates might not even do much to reduce inflation.


----------



## doctrine

wayward__son said:


> I’m not following this. They ran loose policy which boosts stock prices (and other assets) — this is juice for stock based executive comp, not the hourly wages of the stiff who bags your groceries.


Bank of Canada and the US Fed ran an experiment on our economies in 2020 and 2021 where they intentionally let inflation run 'hot" for longer than they normally would. The theory was that a hot economy would result in a labour shortage, and boost the wages of the lowest earners.

This has fully and completely backfired. Not only did inflation far outpace any increase in wages, it wiped out years of progress (if there was any) from increased minimum wages. Plus, it benefitted the rich far more because they owned the most assets that also inflated. And finally, it put the central banks far behind the 8 ball in terms of actually bringing inflation under control. A total failure.

Given where inflation is now, you would think Powell and Macklem would be fired for their decision to let inflation run hot. All sorts of excuses now but everyone is forgetting the failure of the central banks to maintain their core mandate of inflation control. *The central banks intentionally let inflation run out of control for almost two years and now are panicking to bring it under control. *The only way to do so is a lot of interest rate increases. As it stands today, there could be as many as 9 x 0.25% increases in the next 12 months.


----------



## scorpion_ca

doctrine said:


> As it stands today, there could be as many as 9 x 0.25% increases in the next 12 months.


Bring it on. Savers were losers in decades.


----------



## wayward__son

doctrine said:


> Bank of Canada and the US Fed ran an experiment on our economies in 2020 and 2021 where they intentionally let inflation run 'hot" for longer than they normally would. The theory was that a hot economy would result in a labour shortage, and boost the wages of the lowest earners.
> 
> This has fully and completely backfired. Not only did inflation far outpace any increase in wages, it wiped out years of progress (if there was any) from increased minimum wages. Plus, it benefitted the rich far more because they owned the most assets that also inflated. And finally, it put the central banks far behind the 8 ball in terms of actually bringing inflation under control. A total failure.
> 
> Given where inflation is now, you would think Powell and Macklem would be fired for their decision to let inflation run hot. All sorts of excuses now but everyone is forgetting the failure of the central banks to maintain their core mandate of inflation control. *The central banks intentionally let inflation run out of control for almost two years and now are panicking to bring it under control. *The only way to do so is a lot of interest rate increases. As it stands today, there could be as many as 9 x 0.25% increases in the next 12 months.


i agree with all of this in terms of effect of course. I just don’t remember anyone pitching central bank liquidity as a way to help the poors. That would be so patently absurd, maybe I just blocked it out.


----------



## AltaRed

I don't buy into Doctrine's conspiracy theory about a primary motive being to raise 'lower income' wages. I believe the desire coming out of the pandemic was as advertised, to grow GDP and create jobs to get back to full employment, however they come about. I also believe central bankers simply did not take into account, or were blind sided, by supply chain constraints and inflation became more structural than transitory. To each their own.

P.S. I have not seen the increase of minimum wages having any specific ripple effect in the cost of goods and services, albeit fast food menu prices are up, for a variety of reasons. It really does not matter if a Big Mac is $7 or $9. People will (and should) eat less of that crap anyway.


----------



## Covariance

Weekly summary;

yields across the curve continued to move up.
curve is flatter with near term yields moving up more than long term yields
Credit spreads narrowed (Corporates) and as a consequence corporate rates stable to lower despite higher risk free rates.


----------



## AltaRed

Flattening could continue and the yield curve may invert before the end of the year. That is one recession signal.


----------



## james4beach

These economists think the BoC will raise by a full 0.50% in two weeks, and then _another_ 0.50% on June 1.

Does anyone really think that will happen? You think the BoC is going to raise by 100 basis points by June 1?

Economists Now Predict Multiple Half-Point Rate Hikes in Canada
​Markets and economists are expecting the Bank of Canada to embark on one of the most aggressive tightening cycles in the central bank’s history as officials race to bring inflation back under control.​​*In a report Monday, Bank of Montreal ramped up its timeline, predicting Canada will see back-to-back, half-percentage-point hikes at the central bank’s next two policy decisions, beginning April 13. Bank of America Corp. and Citigroup Inc. are forecasting three consecutive 50-basis-point increases.* Markets are more sanguine, with just one outsized move priced in over the next two decisions.​​The new rate calls represent a marked shift in the outlook for borrowing costs that will take many Canadians by surprise and represent a major test for an economy with one of the highest total debt burdens in the developed world. Steeper expectations were stoked last week when Deputy Governor Sharon Kozicki said in a speech the bank will “act forcefully” to quell inflation, which is now rising 5.7% annually, the fastest pace in three decades.​​


----------



## KaeJS

I think they need to do a 0.5% hike.
2 in a row is probably too much.
But I think they need to bang out one of them in the first shot. I'm surprised they didn't do it the first time around.

25 is not enough. And two 50's is too much too soon.

I'm no economist, but if it were me I would do a 50 now and a 25 later.


----------



## Covariance

james4beach said:


> These economists think the BoC will raise by a full 0.50% in two weeks, and then _another_ 0.50% on June 1.
> 
> Does anyone really think that will happen? You think the BoC is going to raise by 100 basis points by June 1?
> 
> ​


The probability is not zero, but a more likely scenario at the next meeting is one of (I) quarter point and QT starts, or (iI) half point and QT is not initiated just yet

The front of the curve has come up and if it stays there they can easily raise as the market has already done it for them.


----------



## londoncalling

We don't hear as much about QT as we do the interest rate. My guess is that is because interest rate affects consumers and savers more directly and easier to personally quantify. I would have thought that the central banks have dumped enough liquidity into the market by now and the introduction of QT would be less shocking to the system. Is there a reason why they haven't already started tightening? What impact does QT have on the short and long end of the curve?


----------



## AltaRed

The last time QT was initiated some 10? years ago, it sent shock waves through the system. Central banks will be more cautious about how fast they reduce their balance sheets this time. How they do it may shape the curve, or not and I have no insight into that at all.

As for the next hike, I am pretty certain it will be 50bp. There are simply too many inflationary pressures not to pull the reins a bit harder on that horse that is in full gallop. Far too early to speculate on June. We will see two more months of CPI numbers before that decision has to be made.


----------



## james4beach

londoncalling said:


> Is there a reason why they haven't already started tightening? What impact does QT have on the short and long end of the curve?


I think they are deathly afraid of QT. This kind of experiment has never been done before.

QE was widely criticized as an unorthodox policy and economists have no idea how it really works. Nobody has ever tightened from something like this before. Many have observed that the S&P 500 has a strong correlation with the Fed balance sheet, so there are concerns that QT will tank the stock market.

The Fed has stopped buying new bonds but they really haven't tightened yet, as I understand it. I don't think they have shrunk their balance sheet yet.


----------



## Covariance

londoncalling said:


> We don't hear as much about QT as we do the interest rate. My guess is that is because interest rate affects consumers and savers more directly and easier to personally quantify. I would have thought that the central banks have dumped enough liquidity into the market by now and the introduction of QT would be less shocking to the system. Is there a reason why they haven't already started tightening? What impact does QT have on the short and long end of the curve?


Regarding QT. The answer is they learned from the last time they implemented this exercise in 2013 (search taper tantrum for reference). Among other things they communicated that they would start to raise rates first and then start to reduce the size of their balance sheet (QT). They have started to raise rates and it is a matter of some speculation as to when they will start QT. They have clearly stated it will start at a future meeting.

QT will be felt on medium and long terms. The impact is quite frankly unknown. Intuitively we expect yields will raise where they are no longer buying bonds. Beyond that it is difficult to assess because market forces will take on an increasing role setting the price of bonds (and thus the yields). Over time this will increase as QT is a gradual process (see below).

Finally, it's important to keep in mind this will be a gradual process. It's not like they will start dumping bonds on the market. Mechanically what happens is they set a target for how much they want to shrink their holdings each month. It is implemented through expiration of maturing bonds they hold that pay back, offset with new purchases to meet a net reduction target. Over time they will expand the net reduction target, but they are still a buyer during this phase.


----------



## m3s

Central banks are in over their heads thinking they could play God with the economy

Wealth has been centralizing for decades now and there are very powerful market players who can manipulate just as much if not more than the central banksters

The market will have a taper tantrum whenever the central banksters don't give them what they want


----------



## londoncalling

Thanks everyone for your insightful replies and reminders of what happened last time QT was implemented. My recollection was foggy on what came first. Central bankers obviously have more intel and expertise than I do on the matter but I would have thought they should have got on both hikes and QT sooner. Perhaps if they had the world would have gone into a tailspin as the sky was falling. Telegraphing the play over several months or years gives me with the impression they are incompetent at worst and fearful at best. This cannot be the case. Also, the average person does not pay as close attention to these things as CMFers. I could also be overstating my knowledge or romanticizing my recollections of former governor Mark Carney. To me the situation then was more dire as the financial markets were in total collapse.

There are some positives to the Canadian situation as the dollar, market and employment are strengthening compared to other areas. Yet today's threats are seem more ominous and the hole that has been dug may take a lifetime to resolve It's like the amounts no longer matter. Millions, billions and trillions are significantly different amounts but most people just shrug and go about their day when they here these numbers referenced. I was a young adult the last time we tried to eliminate the deficit. At the time it seemed like a smart but painful undertaking. It doesn't look like anybody is brave enough or smart enough to make that happen anymore.



Covariance said:


> They have clearly stated it will start at a future meeting.


I find some of the rhetoric that comes from central banks amusing. Of course it will start at a future meeting. It can't start in the past. I understand they must choose their words very carefully as what they say can drastically shift sentiment. Our world leaders live in a world where they try to say alot but in reality say nothing.


----------



## Covariance

londoncalling said:


> Of course it will start at a future meeting.


Just to clarify. In the past they would have said that QT wasn't even being talked about. At the last meeting they said it's on the table for a future meeting. aka it's happening in the next couple of months, if not the next meeting.


----------



## londoncalling

My comment was mostly in jest but it is always good to provide clarity for other readers. I understood what was said as well as what they meant by it. It's just painful to watch these events take place in slow motion. I am sure if one was an active participant it would feel like they just had the January meetings and announcements yesterday. I understand from experience that in leadership positions, a lot of attention is paid to everything you say. One misstatement or misinterpretation of a statement can unravel a lot of effort. I thought as I got older I would get more patient. With some things I have and with others not so much.


----------



## Covariance

Confirmatory economic data - US today and yesterday - puts another plank under Fed raise at their next meeting. Only a question of whether they go for a quarter point & QT or half point. Unemployment rate down to 3.6% and inflation (PCE) at 6.4%.


----------



## james4beach

Covariance said:


> Confirmatory economic data - US today and yesterday - puts another plank under Fed raise at their next meeting. Only a question of whether they go for a quarter point & QT or half point. Unemployment rate down to 3.6% and inflation (PCE) at 6.4%.


Yup, both Canadian and American employment data is looking great. Presumably that gives the central banks more freedom to raise rates.


----------



## james4beach

All the large banks now expect a 0.50% rate hike by the BoC next week, Wednesday April 13.

This would be the largest single rate hike in 22 years.



> It’s unanimous: All six of Canada’s major commercial lenders now expect the Bank of Canada to move ahead with a jumbo rate hike next week.
> 
> Canadian Imperial Bank of Commerce, National Bank of Canada and Toronto-Dominion Bank ramped up their calls for the central bank to raise its policy rate by half a percentage point to 1% at its April 13 decision. They join Bank of Montreal, Bank of Nova Scotia and Royal Bank of Canada in *forecasting what would be the first 50-basis-point hike since 2000.*


----------



## OptsyEagle

Looks like the yield curve is starting to invert. US treasuries have their 2yr and 5 yr rates currently higher then their 10 yr rate and the Cdn governments are showing our 5yr bond yielding more then our 10 year bond right now.


----------



## Ukrainiandude

james4beach said:


> This would be the largest single rate hike in 22 years.


It is highest inflation in forty years. And central banks to afraid to unset real estate speculators to combat 7-10% inflation. 
What kind of shitty government supporting this?

*Canadian Cities Have Seen Up To 90% Of New Real Estate Supply Scooped By Investors*, ie not owner occupied Toronto - 39% of recently completed homes Vancouver - 44% of new housing goes to investors Half of Nova Scotia’s new homes; a third of New Brunswick's

__ https://twitter.com/i/web/status/1482778518257766402


----------



## Covariance

Ukrainiandude said:


> It is highest inflation in forty years. And central banks to afraid to unset real estate speculators to combat 7-10% inflation.
> What kind of shitty government supporting this?
> 
> *Canadian Cities Have Seen Up To 90% Of New Real Estate Supply Scooped By Investors*, ie not owner occupied Toronto - 39% of recently completed homes Vancouver - 44% of new housing goes to investors Half of Nova Scotia’s new homes; a third of New Brunswick's
> 
> __ https://twitter.com/i/web/status/1482778518257766402


For context, new supply is not the same as new delivered into the pool of available housing. It's quite widely known that most new condos are initially purchased by investors as they are bought sight unseen years in advance of the date when they could be occupied. Most people want to buy something they can move into in a timeframe measured in weeks or months at the most. Typical buyers just don't want to buy something 5 years in advance, that they have never seen, and have their deposit tied up for years. The initial investor accepts the risk of construction delays, approvals and the occasional bankruptcy or builder reneging on initial terms.

It would be helpful if those trying to solve the problem focused on availability of affordable rental stock, average price of units that can be moved into right away, etc


----------



## Covariance

james4beach said:


> All the large banks now expect a 0.50% rate hike by the BoC next week, Wednesday April 13.
> 
> This would be the largest single rate hike in 22 years.


Market forces are there already so it's essentially a freebie for the BoC. Will be interesting to hear what they have to say about QT. I saw a statistic somewhere that they own something like 40% of the outstanding Gov't Bonds. That's a lot of crowding out.


----------



## james4beach

IPO activity has practically come to a halt. SPACs are done (bubble has burst). Now the corporate buybacks are declining dramatically, since companies are heavily dependent on financing and the borrowing costs are soaring.

I don't think that most stock investors understand how much companies depend on loans and financing.



Covariance said:


> Market forces are there already so it's essentially a freebie for the BoC. Will be interesting to hear what they have to say about QT.


Good point, the market has already priced in 0.50%. Comments from a Fed member today said the Fed will start QT in May. That probably means the BoC will keep a similar schedule.


----------



## londoncalling

At this point anything less than 1/2 a point would remove all confidence in the credibility of the B of C's role to keep inflation at it's target rate. As for QT, I don't expect anything aside from more talk about being ready to act as needed yadda, yadda, yadda,. I would be pleasantly surprised if they announce any defined moves with QT as they do not want to take any liquidity out of the economy. They can use the invasion of Ukraine, Covid, soft landings etc. as their rationale. The current Canadian economy although having several strong indicators is in a very delicate state due to macroeconomics.


----------



## Covariance

the BoC released a study last year that showed the yield on the 2,5, and 10 years all instantaneously dropped 10 basis points when they announced QE (back in March 2020). We’ll see how much it moves up when they finally announce QT.


----------



## james4beach

Covariance said:


> the BoC released a study last year that showed the yield on the 2,5, and 10 years all instantaneously dropped 10 basis points when they announced QE (back in March 2020). We’ll see how much it moves up when they finally announce QT.


Should also be noted that for all the "tightening" talk, the BoC rate is only expected to be about 1.5% higher at the end of the year. And they haven't QT (reverse of QE) yet.

I suspect that part of the game plan from the central banks (BoC and Fed) is to impress people with all the tightening talk, to help stamp out inflation expectations before they become entrenched in psychology.

But if the BoC rate at the end of the year is 1.75% or 2%, I'm not going to be too impressed. The market has already priced this in anyway.


----------



## Covariance

I expect QT will start this month, or next. They know they are just distorting the market, and not getting anything for it. No one wants inflation so its a freebie to take this step.


----------



## doctrine

New high for Cdn 5 year bond yields yesterday and today. Fixed mortgage interest rates will continue to rise and variable may be going up as much as another 0.5% next week.


----------



## james4beach

doctrine said:


> New high for Cdn 5 year bond yields yesterday and today. Fixed mortgage interest rates will continue to rise and variable may be going up as much as another 0.5% next week.


Should be interesting to watch leveraged real estate investors gradually realize that nobody can buy their properties in bidding wars, any more.

I'm still scared that the Bank of Canada is going to chicken out. I'm not even sure the BoC rate will end the year above 1.5%... seems a bit of a fantasy to me. But I hope so.


----------



## Covariance

james4beach said:


> I'm still scared that the Bank of Canada is going to chicken out. I'm not even sure the BoC rate will end the year above 1.5%... seems a bit of a fantasy to me. But I hope so.


If everyone wants you do to do something it takes courage not to do it. Where it ends the year is way to hard to predict. But in the short term the chicken will cross the road.


----------



## james4beach

Covariance said:


> If everyone wants you do to do something it takes courage not to do it. Where it ends the year is way to hard to predict. But in the short term the chicken will cross the road.


Yeah and I doubt the BoC has that kind of courage. They are staffed by economists who are too closely tied to the banking industry.

Personally I don't think the BoC or Fed is really committed to fighting inflation. I think that's always been the case.


----------



## Covariance

james4beach said:


> Yeah and I doubt the BoC has that kind of courage. They are staffed by economists who are too closely tied to the banking industry.
> 
> Personally I don't think the BoC or Fed is really committed to fighting inflation. I think that's always been the case.


Personally I believe the key issue is a cognitive bias. Classic anchoring and adjustment bias. Updating and projecting with the models they have used for decades instead of recognizing there are structural changes that necessitate new thinking and new models.

That said, they are bright people and at least some recognize this and are scrambling to build new tools.


----------



## james4beach

Covariance said:


> That said, they are bright people and at least some recognize this and are scrambling to build new tools.


I suppose one might say that I hold an asset like gold as a hedge, in case they fail to adapt.


----------



## Covariance

I see HISA is up to 60 basis points now.


----------



## james4beach

Covariance said:


> I see HISA is up to 60 basis points now.


Neat!

TDB8150 is 0.60%
TDB8152 is 0.40% (USD)


----------



## sags

Government cost of living increases are going up as well.

COLA on OAS for January was 1.3%.

As of April 1 another quarterly increase of 1%. In July, anyone over 75 gets another 10% increase, and it is all compounded increases.

Looks like at least a 15% increase in OAS this year for seniors over 75. For couples over 75 that is a $200 a month increase in OAS.......nice.


----------



## nathan79

sags said:


> Government cost of living increases are going up as well.
> 
> COLA on OAS for January was 1.3%.
> 
> As of April 1 another quarterly increase of 1%. In July, anyone over 75 gets another 10% increase, and it is all compounded increases.
> 
> Looks like at least a 15% increase in OAS this year for seniors over 75. For couples over 75 that is a $200 a month increase in OAS.......nice.


It's great, isn't it? I got a 26 percent raise last year. I might even get double that this year... I can hardly contain my excitement!


----------



## Covariance

CAD jobs report very strong again. Unemployment at a recent low. However, wage inflation is running well below CPI so inflation is eroding purchasing power. BoC 0.5% increase next week has to be base case.


----------



## KaeJS

nathan79 said:


> It's great, isn't it? I got a 26 percent raise last year. I might even get double that this year... I can hardly contain my excitement!


Lmao..

I also got 26 cents.

I told my boss and coworkers to expect less from me moving forward.


----------



## KaeJS

Covariance said:


> CAD jobs report very strong again. Unemployment at a recent low. However, wage inflation is running well below CPI so inflation is eroding purchasing power. BoC 0.5% increase next week has to be base case.


I like where your thoughts are.


----------



## MrBlackhill

nathan79 said:


> It's great, isn't it? I got a 26 percent raise last year. I might even get double that this year... I can hardly contain my excitement!





KaeJS said:


> Lmao..
> 
> I also got 26 cents.
> 
> I told my boss and coworkers to expect less from me moving forward.


Wow, whatever are your wages, a 26 cents increase is definitely unacceptable, even on a $10/h wage.


----------



## james4beach

I still really wonder how the Bank of Canada is going to pull this off.

The Canadian economy has been in a real estate / renovation mania for the last ... 10 years? 20 years? In recent years I've noticed that the renovation insanity has really amped up.

Real estate indirectly employs a huge number of people. Much of this is debt financed, including renovations. I recently met a young woman in her 30s who runs a small business. I was really curious to hear what she does for work... in my mind I was guessing that it had something to do with real estate.

And yes, she lays tile. For home renovations and new constructions. Obviously! What else would she be doing? This is Canada, where everything is about RE and home renos. She's actually a middle man between some kind of tile supplier and the actual labour. This is a great example of the huge range of jobs tied to RE.

Want to guess what's going to happen to all these trades people, contractors, and everything associated it when interest rates rise 2% ?

Do you think people will still be tripping over themselves to take out $20,000 loans and renovate their homes? These interest rates are shooting higher as we speak.


----------



## sags

It is still relatively "cheap" to remortgage to do renovations.

When the renos are professionally done and in the right places, they can themselves raise the value of the home.

Most people today are incapable of doing anything much more than cutting the grass or planting flowers, and they all want that Better Home and Gardens look.

So, they are willing to finance the cost for the previous owner to have it done for them. All they want to do is move in and pay the mortgage every month.

It is the extra $50,000......how much is that a month syndrome.


----------



## Covariance

james4beach said:


> I still really wonder how the Bank of Canada is going to pull this off.


BoC and Fed strategy is already starting to work because more and more people are waking up to realize they are actually going to raise rates. People here, who are tuned in, didn’t believe they would until recently. Civilians have no idea until their bills and payments go up which is the next shoe to drop in the coming weeks.

You concern is quite valid. It doesn’t seem like much of the population is prepared for this tightening cycle.


----------



## james4beach

Covariance said:


> BoC and Fed strategy is already starting to work because more and more people are waking up to realize they are actually going to raise rates. People here, who are tuned in, didn’t believe they would until recently. Civilians have no idea until their bills and payments go up which is the next shoe to drop in the coming weeks.
> 
> You concern is quite valid. It doesn’t seem like much of the population is prepared for this tightening cycle.


You make a good point about the policy working, and people waking up. The Federal Reserve talks a lot, because economics is largely psychological. Influencing psychology is a big part of the policy.

The Fed and BoC want people to fear rising rates. I hope it works.

I hope they actually *follow through *with raising rates. Keep in mind, they really haven't raised rates YET, and haven't done QT yet either. It would be really awful if they get scared off the plan and halt the rate hikes, and go back to dovish policy. If they do that within the next 2 years, then the message for the market will be: there is never any need to be cautious, because the Fed will always be dovish, even when they posture and pretend to be hawkish.

My greatest fear right now isn't a recession or market crash, it's the Fed and BoC chickening out and proving -- yet again -- that they will never raise rates. They will never dare kill a hot housing market. Never dare kill speculation, never harm the stock market, never harm Wall Street.

_Remember: that's how they've acted for the last 30 years._

Prove me wrong guys!! Let's see if they have the balls. I have about 50% confidence that the Fed and BoC will raise rates anywhere close to 4%. The bond market thinks they're only getting to 2.5% or so.


----------



## james4beach

I just want to point out, QT is scary. In 2018 when the Fed tried to tighten, they broke segments of the credit markets (there were market dislocations which affected corporate funding). Even Trump started exerting pressure directly on the Fed by making public statements that they should back down. Shortly after the screaming started, the Fed did a 180, and Powell said they wouldn't be so firm on reducing the balance sheet. Basically they tried to tighten, immediately saw economic and market impacts, and chickened out.

When they start QT again in May/June, it's likely something will "break" again. It's impossible to know what will happen, but it's not going to be smooth sailing. And when that happens, Wall Street, politicians, corporate lobbyists, and business people will be crying and begging for the Fed to stop inflicting pain. This is what's going to happen this year.

They're going to scream in pain and say, make it stop. Stop hurting the economy.

What's the Fed and BoC going to do, then? You really think they will raise to 4% and shrink their balance sheet? ... I give it 50% chance.


----------



## KaeJS

MrBlackhill said:


> Wow, whatever are your wages, a 26 cents increase is definitely unacceptable, even on a $10/h wage.


After my 26 cent raise I now make $27.91

😃


----------



## MrBlackhill

KaeJS said:


> After my 26 cent raise I now make $27.91
> 
> 😃


So that's barely 1% increase... How do people at your job/position react to such low raises while the inflation hits 5% and more?

Even if inflation was at the target 2%, that raise is unacceptable.


----------



## KaeJS

MrBlackhill said:


> So that's barely 1% increase... How do people at your job/position react to such low raises while the inflation hits 5% and more?
> 
> Even if inflation was at the target 2%, that raise is unacceptable.


Some people (like me) ***** and complain and work less and not give a fuq anymore.

Some people are "just happy to have a job" and don't care.


----------



## MrBlackhill

KaeJS said:


> Some people (like me) *** and complain and work less and not give a fuq anymore.
> 
> Some people are "just happy to have a job" and don't care.


Will you be part of the Great Resignation? Are you looking at the competition which may offer higher wage?


----------



## james4beach

KaeJS said:


> Some people (like me) *** and complain and work less and not give a fuq anymore.
> 
> Some people are "just happy to have a job" and don't care.


Could be a good time to quit and move to another job. You could send out some applications and see if you hear anything back.


----------



## Eclectic21

james4beach said:


> I still really wonder how the Bank of Canada is going to pull this off.
> 
> The Canadian economy has been in a real estate / renovation mania for the last ... 10 years? 20 years? In recent years I've noticed that the renovation insanity has really amped up ...
> 
> Want to guess what's going to happen to all these trades people, contractors, and everything associated it when interest rates rise 2% ?
> 
> Do you think people will still be tripping over themselves to take out $20,000 loans and renovate their homes? These interest rates are shooting higher as we speak.


The question is what the backlog is versus the workers. Or in your example, management. 

My friend and I did the dry wall to put his house up for sale in 2005 as he wasted two years getting quotes but no workers.
When he complained about it to friends, there response was that they'd experienced the same thing for over a decade.

The flip side was the furnace tech who grilled him on how to get into coding. He'd decided after years in the job that he'd made the wrong choice.


Cheers


----------



## Eclectic21

nathan79 said:


> ... It's great, isn't it? I got a 26 percent raise last year. I might even get double that this year... I can hardly contain my excitement!


Is that a per hour increase or annual increase? 

Either one sucks. 

It reminds me of my incentive to change jobs in the early '90s. For the fourth year in a row, the managers told everyone in the department that they'd like to give raises but the bean counters and execs had decided keeping the streak of a zero increase was needed.

After thinking about it and checking, I realised that the two years of salary increases before that were for being promoted to take on more responsibilities. The zero increase streak was really six years.


I was happy to move to a new company for a new job that paid 60% more and had annual pay increases.


Cheers


----------



## doctrine

doctrine said:


> New high for Cdn 5 year bond yields yesterday and today. Fixed mortgage interest rates will continue to rise and variable may be going up as much as another 0.5% next week.


More increases. 5 year rates up 0.15% in the last 7 days. Interest rates generally up today both here and the US. I can't imagine this will result in cheaper mortgages this week.


----------



## Ukrainiandude

Oaken Financial - Our GIC rates







www.oaken.com




3 Years GIC – 3.70%

Better than nothing.


----------



## james4beach

How are the home renovations going to continue with interest rates going up like this?


----------



## londoncalling

Most were already completed in the last 2 years during pandemic boredom. It is expected that anyone else who is looking at renos is waiting for a decrease in cost. Whether we will see costs come down is unknown. A lot of forecasters are indicating a national labour shortage in the skilled trades not just in real estate hot spots like Vancouver and Toronto. A lot of that discretionary income/debt has been earmarked for entertainment and travel. A week at an all inclusive is cheaper than a new bathroom. And why not. We deserve it. It's been forever since we got to go on a holiday.


----------



## james4beach

Well time will tell, but a huge % of our economy is based on real estate flipping and home renovations.

Nearly all of it is debt financed.


----------



## londoncalling

You are right about that @james4beach.

RE is definitely being tested and if there is not a soft landing and there is a crash many will say that the bubble should have been popped long ago. I do not wish to see the pain and suffering that others went through in the 80s where people were walking away from their homes and declaring bankruptcy. I don't plan to make any sudden moves as it pertains to real estate. It may be what is needed for the overall health of the economy longer term. It also may be the only way some people will get a chance to own property. Alternatively, we may see more intergenerational occupancy if housing remains unaffordable. If RE continues to climb rents won't be going down either.


----------



## gardner

There is some sort of weird rate curve inversion with HT/Oaken at least:

1 Year GIC – 2.60% (currently 2.25%)
18 Months GIC – 2.85% (currently 2.70%)
2 Years GIC – 3.30% (currently 2.95%)
3 Years GIC – 3.70% (currently 3.40%)
4 Years GIC – 3.65% (currently 3.15%)
5 Years GIC – 3.70% (currently 3.20%)
I wonder why the dip at 4 years?

Anyway, I think increasing interest rates is going to be what gets housing prices under control. When people can't afford to borrow enough they will stop bidding up prices so crazily. Maybe some will be forced to sell at realistic prices. There could be a major RE crash, but I doubt that. The mortgage stress test rules have been in place for a while.


----------



## undersc0re

Interest rates in combination with the continually rising insane house prices are allowing people to feel comfortable grabbing more debt and increasing their mortgages!?
I just had a conversation with a young fellow who said he bought his house for 425,000 now owing 380,000 and just paid to have it appraised at 775,000 so that he could break his mortgage for a fee and remortgage his home for approx 550,000. He was allowed to refinance in a way to roll his new truck, suv, 2 maxed credit cards, a large maxed line of credit, camper trailer loan and some furniture place card….putting all of this onto his mortgage. He said they gave him a fresh credit card and line of credit as well to help out…he went on to say how he couldn’t wait to spend the money on the new credit before his wife does.
When the interest rate goes up I imagine there are a lot of people doing this that will be crying the blues, I doubt they will raise interest rates too much for this reason.
Sometimes I feel like jumping on that debt bandwagon but keep resisting, it almost seems like the people in debt are winning the rapid inflation game right now.


----------



## james4beach

undersc0re said:


> I just had a conversation with a young fellow who said he bought his house for 425,000 now owing 380,000 and just paid to have it appraised at 775,000 so that he could break his mortgage for a fee and remortgage his home for approx 550,000. He was allowed to refinance in a way to roll his new truck, suv, 2 maxed credit cards, a large maxed line of credit, camper trailer loan and some furniture place card….putting all of this onto his mortgage. He said they gave him a fresh credit card and line of credit as well to help out…he went on to say how he couldn’t wait to spend the money on the new credit before his wife does.


That's exactly the kind of stuff I expect many Canadians are doing.

This debt party isn't over yet. I think your story also shows how dangerous easy credit and inflated property values are.


----------



## KaeJS

The government won't let housing crash. Canada would be in way too much hot water. Will housing come down? Yes. Absolutely it will. But there cannot be a crash because a crash would be total destruction.

I keep thinking back to March 2020 when I got a 6 month deferral on my mortgage for just calling the bank for 2 minutes. 

I think these types of deferrals and longer amortizations are things we will see in the future to soften or dampen any extreme crash scenario.

I would like to see a slight decline and then stagnating home prices while we give some time for wages to go up to help offset some things. It sounds impossible, but it might not be. Won't be easy, though.


----------



## scorpion_ca

*Be careful what you sign: Ontario man fighting for home after private mortgage gone wrong*



https://www.cbc.ca/news/canada/toronto/markham-man-private-mortgage-1.6411361


----------



## diharv

undersc0re said:


> I just had a conversation with a young fellow who said he bought his house for 425,000 now owing 380,000 and just paid to have it appraised at 775,000 so that he could break his mortgage for a fee and remortgage his home for approx 550,000. He was allowed to refinance in a way to roll his new truck, suv, 2 maxed credit cards, a large maxed line of credit, camper trailer loan and some furniture place card….putting all of this onto his mortgage. He said they gave him a fresh credit card and line of credit as well to help out…he went on to say how he couldn’t wait to spend the money on the new credit before his wife does.


People like this are braindead and any financial reckoning that comes their way as a result of rising interest rates is well deserved.


----------



## AltaRed

gardner said:


> There is some sort of weird rate curve inversion with HT/Oaken at least:
> 
> 1 Year GIC – 2.60% (currently 2.25%)
> 18 Months GIC – 2.85% (currently 2.70%)
> 2 Years GIC – 3.30% (currently 2.95%)
> 3 Years GIC – 3.70% (currently 3.40%)
> 4 Years GIC – 3.65% (currently 3.15%)
> 5 Years GIC – 3.70% (currently 3.20%)
> I wonder why the dip at 4 years?


They may not really want 4 year money.because folks are not wanting 4 year mortgage terms. Rate setting is all about matching assets and liabilities.


----------



## Covariance

BOC announced this morning an increase of 50 bps, and beginning QT later this month.


----------



## MrMatt

KaeJS said:


> The government won't let housing crash. Canada would be in way too much hot water. Will housing come down? Yes. Absolutely it will. But there cannot be a crash because a crash would be total destruction.
> 
> I keep thinking back to March 2020 when I got a 6 month deferral on my mortgage for just calling the bank for 2 minutes.
> 
> I think these types of deferrals and longer amortizations are things we will see in the future to soften or dampen any extreme crash scenario.
> 
> I would like to see a slight decline and then stagnating home prices while we give some time for wages to go up to help offset some things. It sounds impossible, but it might not be. Won't be easy, though.


Banks don't want to foreclose either. My mortgage contract has deferrals built into it. If you make a double payment, you can later skip that payment.
I think I'll structure my prepayments that way for that reason.


----------



## undersc0re

diharv said:


> People like this are braindead and any financial reckoning that comes their way as a result of rising interest rates is well deserved.


I forgot to mention they also had taken advantage of the mortgage and loan deferral program for covid, even though they were working full time…crazy. No wonder there was a shortage and inflation went crazy.


----------



## undersc0re

KaeJS said:


> The government won't let housing crash. Canada would be in way too much hot water. Will housing come down? Yes. Absolutely it will. But there cannot be a crash because a crash would be total destruction.
> 
> I keep thinking back to March 2020 when I got a 6 month deferral on my mortgage for just calling the bank for 2 minutes.
> 
> I think these types of deferrals and longer amortizations are things we will see in the future to soften or dampen any extreme crash scenario.
> 
> I would like to see a slight decline and then stagnating home prices while we give some time for wages to go up to help offset some things. It sounds impossible, but it might not be. Won't be easy, though.


 So either we need a crash/reset, or there will be a very long term slow growth scenario….or a bit of both? It could get ugly, if they try to increase immigration too much too quickly it will cause even more problems with supply of doctors or housing etc...


----------



## diharv

undersc0re said:


> I forgot to mention they also had taken advantage of the mortgage and loan deferral program for covid, even though they were working full time…crazy. No wonder there was a shortage and inflation went crazy.


Users and abusers.


----------



## Ukrainiandude

Covariance said:


> increase of 50 bps


Too little, too late.


----------



## Ukrainiandude

*The Bank of Canada waited too long to start raising interest rates








Opinion: The Bank of Canada waited too long to start raising interest rates


The half-percentage-point increase announced this week is tacit recognition that the Bank of Canada has fallen behind the curve




www.theglobeandmail.com




*


----------



## Eclectic21

undersc0re said:


> I forgot to mention they also had taken advantage of the mortgage and loan deferral program for covid, even though they were working full time…crazy. No wonder there was a shortage and inflation went crazy.


I'm not sure it had the effect you are assuming. 

In 2020, three million plus were reported to have used the covid credit deferral programs. In 2021, four out of five were reported to have stopped using the deferral program, dropping the numbers to something like 600K still using it.

In 2020, mortgage deferrals were 900K, which likely means in 2021 mortgages were down to 180K.


Cheers


----------



## Covariance

HISA 0.75% this morning.


----------



## Ukrainiandude

Covariance said:


> HISA 0.75% this morning.


Accelerate up to 1.70% today


----------



## james4beach

Even the Government of Canada 1 year bond is 2.05% yield which is pretty amazing. And a 2 year GIC from a "big 5" bank now yields 2.8%

Pretty amazing overall. Lots of options even for short term / near-cash storage.


----------



## nathan79

It looks like rates are going to keep going up for a while. I might start a GIC ladder when/if I can get a 5-year for at least 5%. If not I'll just continue chasing promotions. I'm certainly not in a hurry to lock in my money.


----------



## james4beach

nathan79 said:


> It looks like rates are going to keep going up for a while. I might start a GIC ladder when/if I can get a 5-year for at least 5%. If not I'll just continue chasing promotions. I'm certainly not in a hurry to lock in my money.


But nobody knows where rates will top out.

You might end up waiting forever. The GIC rates may not ever touch 5% and if you sit in cash this whole time, you'll end up with an inferior return versus a 5 year GIC ladder where you keep buying GICs. This is the danger with timing interest rates.

Or maybe there's a severe global economic downturn, or a banking crisis, and before you know it the central banks cut rates near zero again. In that scenario you could have locked in over 3% yields but you will never see those yields again.

This is why the passive fixed income approach is usually the best way to go, things like a GIC ladder or a bond fund, with continuous exposure.


----------



## nathan79

james4beach said:


> But nobody knows where rates will top out.
> 
> You might end up waiting forever. The GIC rates may not ever touch 5% and if you sit in cash this whole time, you'll end up with an inferior return versus a 5 year GIC ladder where you keep buying GICs. This is the danger with timing interest rates.


That's okay. I'm not talking about putting a huge amount in GICs (maybe 50K at the most), and I'm already getting 2.8% on my savings at Tangerine, so I'm not too excited about getting an extra 0.5% right now. I expect better offers to appear over the next 6 months, so I'm just going to monitor the situation for now. If it looks like rates are topping out I may change my mind, but I won't be too sad it turns out I missed out on an additional 1% or something.


----------



## MrBlackhill

Rates hikes won't last long. We'll have them this year, then at some point they won't know how to deal with the imminent recession indicators, so they'll stop the rates hikes, but it'll be too late and we'll get a recession, and then rates will be dropped back down.









'Risk of a recession is rising' as problems just keep 'cascading' throughout the economy, economist says


Roughly 40% of economists believe a recession is coming sometime over the next 24 months, according to a recent poll.




fortune.com


----------



## MrMatt

MrBlackhill said:


> Rates hikes won't last long. We'll have them this year, then at some point they won't know how to deal with the imminent recession indicators, so they'll stop the rates hikes, but it'll be too late and we'll get a recession, and then rates will be dropped back down.
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 'Risk of a recession is rising' as problems just keep 'cascading' throughout the economy, economist says
> 
> 
> Roughly 40% of economists believe a recession is coming sometime over the next 24 months, according to a recent poll.
> 
> 
> 
> 
> fortune.com


I think we're going to have to overshoot, just to get people to believe that yes rates really will go up.
I think people have been underpricing risk.


----------



## gardner

james4beach said:


> The GIC rates may not ever touch 5%


I just got _another_ rate update from HT/Oaken offering 4.0% for 5 years. I suspect the 5Y GIC rate will see 5%.


----------



## doctrine

Canada 5 year government bond yields closed at a new 10+ year high today. Don't think you'll see any relief in relentlessly increasing higher mortgage rates for a while.


----------



## james4beach

gardner said:


> I just got _another_ rate update from HT/Oaken offering 4.0% for 5 years. I suspect the 5Y GIC rate will see 5%.


I hope so too, but mainly because it means mortgage rates would be over 5% then. I'm hoping that ends this housing bubble.


----------



## Ukrainiandude

*Bank of Canada’s inflation focus suggests another large rate increase, economists say
As a rule, the Bank of Canada does not spell out its expected path for interest rates. But Governor Tiff Macklem said on Wednesday that he wants to get back to a neutral policy rate of between 2 per cent and 3 per cent relatively quickly. The bank previously estimated that the neutral rate lay between 1.75 per cent and 2.75 per cent.*
While the Bank of Canada appears keen to accelerate its campaign against inflation, elevated levels of household debt and an overreliance on real estate to drive the economy could limit how far and how fast the bank can move without causing a recession.

“We’re still skeptical that the bank will be able to get rates back to neutral, let alone the 3 per cent or higher currently priced in by the futures market,” Paul Ashworth, chief North America economist with Capital Economics, wrote in a note to clients.

“Canada’s economy is also much more dependent on residential investment than any other advanced country,” he said.

“The conundrum the Bank of Canada faces is that residential investment is the most rate-sensitive part of any economy. Even if house prices don’t fall back, squeezing household wealth and weighing on consumer spending, we can expect some marked declines in residential investment, particularly from such a high starting point.”








Bank of Canada’s inflation focus suggests another large rate increase, economists say


Economists are reassessing their outlook for Canadian interest rates after the Bank of Canada’s oversized move on Wednesday and tough talk from the bank’s governor about bringing inflation back under control




www.theglobeandmail.com


----------



## londoncalling

Risk-Reward in a Hiking Cycle (mailchi.mp) 

Although the link utilizes US data I believe correlations can be to other markets. I am also invested in equities outside of Canada. Commodities should continue to do well based on that information but I am reluctant to allocate more money at this time. Having been quite active with my portfolio as of late I don't intend to tinker much more with the portfolio. So far I have outperformed the index, as my winners have been larger positions than my losers, but at some point my luck may run out. I may add a REIT at some point as new money and dividends accumulate. I am waiting to see how the recent rate increase plays out and the next announcements in June. If anything I will be adding to existing positions. Not ready to hop onto the fixed income band wagon yet. Another hike in upcoming months may persuade me to reconsider.


----------



## Ukrainiandude

58% already had a home and was trying to purchase more.

"Another 39 per cent said they already owned one property and were purchasing another one. Finally, 19 per cent said they owned multiple properties, while two per cent preferred not to answer. "

until prices are normalized Canadians should be unable to own more than one residential property. This is the only real solution to housing market crisis.


----------



## james4beach

Ukrainiandude said:


> 58% already had a home and was trying to purchase more.
> 
> "Another 39 per cent said they already owned one property and were purchasing another one. Finally, 19 per cent said they owned multiple properties, while two per cent preferred not to answer. "
> 
> until prices are normalized Canadians should be unable to own more than one residential property. This is the only real solution to housing market crisis.


Notice that this is exactly what I have been shouting about in my other threads.

Property ownership in Canada is highly concentrated among those who *already* have homes. And guess what happens when new homes are built? They quickly get snatched up by existing property owners, added to someone's portfolio of rental properties.


----------



## doctrine

5 year fixed rate mortgages inching above 4% now. 4.15% at some places now.

If you took a 2.5% 5 year variable today, you might be at 4% by the end of the summer.


----------



## james4beach

doctrine said:


> 5 year fixed rate mortgages inching above 4% now. 4.15% at some places now.


Sounds like a real bargain. Analysts think the central bank will go at least 2% higher, so mortgages could easily be over 6% soon.


----------



## Money172375

Tangerine HISA is 0.1%?
my promo offer expires Sunday.

Who traditionally offers the best non-promo rate?


----------



## Ukrainiandude

Where are all folks who were predicting that rate increase was “totally“ priced in?


----------



## Ukrainiandude

Money172375 said:


> Tangerine HISA is 0.1%?
> my promo offer expires Sunday.
> 
> Who traditionally offers the best non-promo rate?











Comparison chart


Last updated: December 20, 2022 This chart summarizes Canadian high interest savings account rates and is for informational purposes only. The rates are subject to change and there are more features to an account than its rate. Always be sure to check the specific banks' / financial...




www.highinterestsavings.ca


----------



## MrMatt

Ukrainiandude said:


> Where are all folks who were predicting that rate increase was “totally“ priced in?


Honestly I think the rate increases are long overdue, but they're rising a bit faster than I expected.
This high inflation is only partially due to interest rates, a lot of it is due to other factors and while adjusting rates is a powerful tool, it can't actually counteract everything else that's going on.

Just wait till the high inflation hits all the CoL adjustments in various benefits... we're in for a lot of hurt.


----------



## james4beach

MrMatt said:


> Just wait till the high inflation hits all the CoL adjustments in various benefits... we're in for a lot of hurt.


As a society, we've barely started to grasp the impacts of these high CPI readings.

Next year, rents (which are capped to inflation) are going to go up by amounts people haven't seen in their lifetimes. Perhaps increases of 5% to 7% for most renters... people are going to be devastated. Most renters have no idea this is coming, so it's going to hit them like a freight train about 8 months from now.

Seniors are going to be absolutely screwed. Those already on the edge could get pushed into poverty as they will struggle to afford food and rent.


----------



## KaeJS

james4beach said:


> As a society, we've barely started to grasp the impacts of these high CPI readings.
> 
> Next year, rents (which are capped to inflation) are going to go up by amounts people haven't seen in their lifetimes. Perhaps increases of 5% to 7% for most renters... people are going to be devastated. Most renters have no idea this is coming, so it's going to hit them like a freight train about 8 months from now.
> 
> Seniors are going to be absolutely screwed. Those already on the edge could get pushed into poverty as they will struggle to afford food and rent.


Are you kidding?

If you rent for 2k a month and it goes up 5%, that's only a hundred bucks. Who cares?

I can't see people freaking out and losing their minds over a 5% rent increase. It's just not big enough.


----------



## james4beach

KaeJS said:


> If you rent for 2k a month and it goes up 5%, that's only a hundred bucks. Who cares?
> 
> I can't see people freaking out and losing their minds over a 5% rent increase. It's just not big enough.


I guarantee you it's significant. Many people don't have this kind of wiggle room. Someone renting a multiple bedroom home for their family at maybe $2400 is looking at $1700 extra, in a year. Yeah some people can absorb that but many can't.

_Food and rent together_ absolutely can push people over the edge. For example, a senior in a 1 bedroom apartment, the increase in food + rent together could easily be an extra $2,000 in a year. In the scope of an annual budget, that's a lot of money to most people.


----------



## MrBlackhill

KaeJS said:


> If you rent for 2k a month and it goes up 5%, that's only a hundred bucks. Who cares?


Which is $1,200 at the end of the year. Which is significant to a lot of people.

I would personally care a lot if I saw my spendings increase by $1,200.

Meanwhile, how many have seen their income increase by $1,200?


----------



## MrMatt

james4beach said:


> As a society, we've barely started to grasp the impacts of these high CPI readings.
> 
> Next year, rents (which are capped to inflation) are going to go up by amounts people haven't seen in their lifetimes. Perhaps increases of 5% to 7% for most renters... people are going to be devastated. Most renters have no idea this is coming, so it's going to hit them like a freight train about 8 months from now.
> 
> Seniors are going to be absolutely screwed. Those already on the edge could get pushed into poverty as they will struggle to afford food and rent.


I agree, they have no idea how bad inflation is, that's why they keep voting for bad policy.

The rent situation is even worse, there is still a lot of pressure for a rent freeze, but city taxes go up by more than inflation every year, rates are going higher. The landlords need to hike rents by MORE than inflatin to keep up.
The housing shortage might get even worse.


----------



## Eclectic21

james4beach said:


> ... Property ownership in Canada is highly concentrated among those who *already* have homes.


So it's a solution to ban the people who are helping their relatives buy a home?




james4beach said:


> ... And guess what happens when new homes are built? They quickly get snatched up by existing property owners, added to someone's portfolio of rental properties.


Hmmm ... if it is happening as you much as you say, I wonder why only one of the last ten home sales in my neighbourhood is for a rental?

Then too, if new homes are all being bought for rentals, what makes you think that existing homes aren't being snatched up as well?


Cheers


----------



## KaeJS

james4beach said:


> I guarantee you it's significant. Many people don't have this kind of wiggle room. Someone renting a multiple bedroom home for their family at maybe $2400 is looking at $1700 extra, in a year. Yeah some people can absorb that but many can't.
> 
> _Food and rent together_ absolutely can push people over the edge. For example, a senior in a 1 bedroom apartment, the increase in food + rent together could easily be an extra $2,000 in a year. In the scope of an annual budget, that's a lot of money to most people.


While you aren't wrong that food and rent are going to keep increasing - I just don't think it's significant enough.

People will cut out other things (alcohol, entertainment, etc) or buy cheaper food.

Seniors will hopefully ask family for an extra few bucks a month if they need it badly enough.

Sorry, but I just don't think a 5% rent increase would cause waves, even combined with rising food/fuel/everything costs.


----------



## Covariance

KaeJS said:


> Are you kidding?
> 
> If you rent for 2k a month and it goes up 5%, that's only a hundred bucks. Who cares?
> 
> I can't see people freaking out and losing their minds over a 5% rent increase. It's just not big enough.


Most people spend everything they earn. By choice or by circumstances. It is a matter of simple math that they will be squeezed. 

Year over year growth of average hourly earnings less CPI tells the whole story. When it's negative people are getting squeezed. That said, people can go some period of time drawing down savings, mortgaging their homes etc before it all falls apart. But as @james4beach points out those with no savings and no assets to borrow against will feel it first.


----------



## sags

Temporary inflation benefit of $500 a month to everyone earning $40K or less.......reduced by 5% for every additional $1K income.

Totally eliminated for incomes $60K or more.

Benefit paid from surplus government revenues from increased sales taxes, income taxes and royalties.

It would relieve pressure on employers to increase wages, encourage people to work at lower paid jobs, and generate GDP growth.

The benefit can be adjusted or eliminated, depending on future inflation. Sitting around complaining about inflation isn't going to solve anything.


----------



## KaeJS

sags said:


> Temporary inflation benefit of $500 a month to everyone earning $40K or less.......reduced by 5% for every additional $1K income.
> 
> Totally eliminated for incomes $60K or more.
> 
> Benefit paid from surplus government revenues from increased sales taxes, income taxes and royalties.
> 
> It would relieve pressure on employers to increase wages, encourage people to work at lower paid jobs, and generate GDP growth.
> 
> The benefit can be adjusted or eliminated, depending on future inflation. Sitting around complaining about inflation isn't going to solve anything.


Most ridiculous thing I have ever heard.


----------



## Covariance

sags said:


> Temporary inflation benefit of $500 a month to everyone earning $40K or less.......reduced by 5% for every additional $1K income.
> 
> Totally eliminated for incomes $60K or more.
> 
> Benefit paid from surplus government revenues from increased sales taxes, income taxes and royalties.
> 
> It would relieve pressure on employers to increase wages, encourage people to work at lower paid jobs, and generate GDP growth.
> 
> The benefit can be adjusted or eliminated, depending on future inflation. Sitting around complaining about inflation isn't going to solve anything.


There is no Gov't surplus as they spend more than they collect. Furthermore this measure would only make matters worse. Inflation is a matter of supply and demand imbalance. The solution is to either increase supply or decrease demand. Increasing demand by spending more directly or indirectly by the Gov't only makes matters worse.

I am not suggesting people who deserve assistance do not receive it. Merely pointing out that incremental measures that increase demand are not viable solutions.


----------



## sags

Governments are taking in more revenue than expected. Alberta announced they now have a balanced budget due to unexpected increased revenue.

A temporary inflation benefit would increase inflation slightly, but so does increased interest rates.

Lowering taxes is the same as paying out a benefit to those people, and is similarly inflationary as a benefit would be.

Governments will provide a benefit to offset inflation, because they will feel the public pressure to do so. The only question is how they do it.

Ontario's Doug Ford just pledged to cut taxes. Others are sure to follow. Good luck stopping the tsunami of pubic demands on governments for help.


----------



## MarcoE

KaeJS said:


> Are you kidding?
> If you rent for 2k a month and it goes up 5%, that's only a hundred bucks. Who cares?
> I can't see people freaking out and losing their minds over a 5% rent increase. It's just not big enough.


$100 is very significant for many families. When I first immigrated to Canada, most of my income went to covering rent. I barely had money left for food. I would eat plain white rice mixed with a can of corn, sometimes ramen. Fresh fruit and vegetables was a real luxury, one I often could not afford. Many Canadians today too are living like this... struggling to choose between rent, food, and medicine. An extra $100 can tip them over the edge. It can mean giving up meals, or having to eat ramen for dinner instead of vegetables. I remember when my rent went up 3% and it was a serious blow. 5% would have crushed me.


----------



## Covariance

sags said:


> Governments are taking in more revenue than expected. Alberta announced they now have a balanced budget due to unexpected increased revenue.
> 
> A temporary inflation benefit would increase inflation slightly, but so does increased interest rates.
> 
> Lowering taxes is the same as paying out a benefit to those people, and is similarly inflationary as a benefit would be.
> 
> Governments will provide a benefit to offset inflation, because they will feel the public pressure to do so. The only question is how they do it.
> 
> Ontario's Doug Ford just pledged to cut taxes. Others are sure to follow. Good luck stopping the tsunami of pubic demands on governments for help.


Raising interest rates reduces inflation because it reduces demand and stimulates savings over consumption.


----------



## Covariance

Fed day on Wed. Base case is +50bps and QT.

Have a good week all.


----------



## james4beach

Covariance said:


> Fed day on Wed. Base case is +50bps and QT.
> 
> Have a good week all.


This is quite a week actually. Later in the week there's US jobless claims and unemployment readings. Lots of stuff happening this week!


----------



## KaeJS

Bloodbath for REITs today.
I wonder how much further these will drop.


----------



## scorpion_ca

KaeJS said:


> Bloodbath for REITs today.
> I wonder how much further these will drop.


Not sure what was the reason for dropping today but I hope it drops further that I can buy more ZRE.


----------



## londoncalling

The only REIT I hold currently is CHP.UN. I have been having trouble finding opportunity in this sector. I don't want to own retail or office. Industrial and apartments have done well in comparison.


----------



## Juggernaut92

KaeJS said:


> Bloodbath for REITs today.


Got out of riocan last week. May buy some smart centre's if it keeps getting lower.


----------



## Covariance

scorpion_ca said:


> Not sure what was the reason for dropping today


Bond yields going up.


----------



## james4beach

KaeJS said:


> Bloodbath for REITs today.
> I wonder how much further these will drop.


Yeah. You might recall that I've been posting warnings here for real estate investors because I want to help them out.

Liquidity is being yanked and I think real estate people are slow to realize what's going on. Partly I think their slowness comes from not understanding how they have benefited from central bank policy. It's really the central bank's rock bottom interest rates which have pumped RE sky high for the last 30 years, and especially the last 10 years.

But many RE people don't quite understand that, and think it's natural for RE to perform like this. They don't grasp that RE is fuelled by liquidity and zero rates... this has been an artificial situation.

Gradually, RE people are going to catch on and deleverage / liquidate. The sharper ones will dump early and hold on to their riches.

Some will try to *leverage up* during this downturn, as they have been conditioned to do through previous corrections. This is the problem with chronically low interest rates. It has trained people to do some really stupid things.


----------



## doctrine

Real Estate and REITs are triply affected by rising interest rates. Higher rates make their interest costs higher to run their business because they are all highly leveraged, it makes their assets worth less because it costs more in interest to buy them with borrowed money, and thirdly it makes them less competitive as an asset because REIT distributions rarely rise very much; 5 and 10 year bond yields are now around 3% in Canada and the US and that is starting to become competitive and attract funds flows, and is likely going higher.

5 year benchmark Canada government bond yields reached a new high on Monday. Fixed mortgage rates inched up again and can be found at 4.25%. This problem of higher interest isn't going away anytime soon and people should be prepared for it either way, either to adjust to the new reality or to batten down the hatches.


----------



## KaeJS

I'm continuing to buy REITs.
I think inflation is close to tapping out. I don't think it will go up much more. I assume it will level off and the rate increases will become less severe.

In any case, the REITs are still collecting cash. I'm happy to collect my distributions and ride the storm by adding at lower prices. Most of them were down 4-5% yesterday, after already being down quite a bit from the prior month.


----------



## londoncalling

I think there will be more short term pressure on REITs and the market in general over the next quarter or two I haven't seen a peak yet in my personal inflation so I don't expect inflation to go away anytime soon. I think the peak will be soon. Many of the items that have seen price escalation are larger ticket items (vehicles, housing). The economy is doing well so people are still spending but I think that spending is wavering due to the recent hikes. This should help cool inflation. As for fuel and food demand is not easy to curb. In the meantime I will keep searching. I haven't done any analysis yet but Boardwalk may do well if the commodity bull has a long run.

edit: fix typo


----------



## james4beach

londoncalling said:


> I haven't seen a peak yet in my personal inflation so I don't expect inflation to go away anytime soon


That's a really interesting point. Same here, inflation is hitting me slowly. My travel costs have been lower than usual because I was only doing short domestic travels. Only now are my travel costs bouncing back towards normal.

On top of that the next rent increases won't hit me until next year. Currently inflation is not noticeable (in my tracking of spending) but it's creeping up gradually.

Inflation obviously exists but it will take a few more months (maybe the rest of this year) before I really feel it in full.


----------



## Gator13

We eat pretty healthy so we've noticed a pretty hefty increase in our grocery bills. Fuel costs have also gone up. Wine bill is definitely up....nothing to do with inflation though. lol

As for travel, there have been some great deals on domestic flights, but car rental prices are way up.

Although it doesn't apply to us, I read an article today that rent prices are expected to jump. (I have no idea how rent control works and it was not discussed in the article)


----------



## londoncalling

We took a domestic holiday last fall and haven't left the country since the pandemic. We have put off our trip to Europe as we cannot take off the amount of time we would like and are now looking to the US. Hotels and AirBnBs are much more pricy than when we last traveled out of country. Perhaps it is location specific and we should look to other cities or neighbourhoods. As mentioned upthread and elsewhere vehicle rentals this summer are near impossible.


----------



## james4beach

Gator13 said:


> Although it doesn't apply to us, I read an article today that rent prices are expected to jump. (I have no idea how rent control works and it was not discussed in the article)


Rent is going to slaughter people next year.

Many provinces cap the annual rent increase using the inflation rate. In BC for example, the CPI reading ending in July is used to set the maximum rent increase for next year. It's likely that by July, inflation will be 7% or something like that. So the province will set the 2023 maximum allowable rent increase to 7%. And that means everyone's rent will go up 7% some time next year, depending on the anniversary date of their agreements.

Renters have not realized this yet but it's coming, and it's going to hit them really hard in 2023.

The rules are similar in Ontario and probably some other provinces. The point is that rents will increase according to the inflation rate, but it's happening 8 months from now.


----------



## MrMatt

james4beach said:


> Rent is going to slaughter people next year.
> 
> Many provinces cap the annual rent increase using the inflation rate. In BC for example, the CPI reading ending in July is used to set the maximum rent increase for next year. It's likely that by July, inflation will be 7% or something like that. So the province will set the 2023 maximum allowable rent increase to 7%. And that means everyone's rent will go up 7% some time next year, depending on the anniversary date of their agreements.
> 
> Renters have not realized this yet but it's coming, and it's going to hit them really hard in 2023.
> 
> The rules are similar in Ontario and probably some other provinces. The point is that rents will increase according to the inflation rate, but it's happening 8 months from now.


I don't think so. I think they'll happily cap rent and screw over the landlords again. 

There are more votes to be made by destroying the rental housing market, than ensuring it's health and viability. 
yet people wonder why there is a lack of rental housing.


----------



## sags

Rent controls only apply to older rental units, and landlords can pass along increased expenses.

If someone buys a rent controlled building today for a price the rents won't support....maybe they shouldn't be landlords.

The reality is that rent controlled buildings have lower market values, because they are old and are rent controlled.


----------



## Covariance

US Fed raised 50bps and initiated QT (as expected)


----------



## james4beach

MrMatt said:


> I don't think so. I think they'll happily cap rent and screw over the landlords again.


Those poor landlords!! Can't they ever catch a break?

30 years of leveraged real estate gains making them super asset-rich, the wealthiest class in this country, hoarding all the properties and keeping them out of the hands of young professionals... but yeah I guess they are always shafted by society.

Why is life so unfair? Those poor, poor, property investors... my heart BLEEDS for them!


----------



## MrMatt

james4beach said:


> Those poor landlords!! Can't they ever catch a break?
> 
> 30 years of leveraged real estate gains making them super asset-rich, but yeah I realize they are always shafted by society.
> 
> Can't they ever catch a break!! Those poor guys!


Ahh yes, how dare they make money provided a service to people who want it. We should punish them!


----------



## james4beach

MrMatt said:


> Ahh yes, how dare they make money provided a service to people who want it. We should punish them!


They're humanitarians!! Providing a useful service... and with government stimulus and central banks handing them free money for 20 years.

Can we erect some statues to thank the leveraged property investors for everything they've done for this country?


----------



## MrMatt

james4beach said:


> They're humanitarians!! Providing a useful service... and with government stimulus and central banks handing them free money for 20 years.
> 
> Can we erect some statues to thank the leveraged property investors for everything they've done for this country?


Well the government shouldn't have been stimulating so much.

But we don't need to build statues, I'm perfectly happy to simply let them build housing so people have somewhere to live.

But yes, I do think it's great that they were using their resources to provide housing for people, sure they benefitted, but so did their tenants. It's a win-win situation.


----------



## AlexInvestSavvy

Covariance said:


> US Fed raised 50bps and initiated QT (as expected)


I am convinced it has become a Buy signal whenever Powell speaks! 😄


----------



## Gator13

A very interesting article regarding the CMHC.....

CMHC warns it may not regain market share on mortgage insurance - The Globe and Mail


----------



## AlexInvestSavvy

I really empathize with this guy on interest rates. Mind you, I wouldn't want to have Powell's job... ;-) https://finance.yahoo.com/news/powell-throws-stock-bulls-a-bone-heres-how-to-invest-120021667.html


----------



## londoncalling

AlexInvestSavvy said:


> I really empathize with this guy on interest rates. Mind you, I wouldn't want to have Powell's job... ;-) https://finance.yahoo.com/news/powell-throws-stock-bulls-a-bone-heres-how-to-invest-120021667.html


My favorite portion of the article is this quote:

"Sit on your hands, if necessary. Sit on them until they hurt. That's the discipline."


----------



## sags

Wait for the bat signal in the sky.


----------



## doctrine

Interest rates are flying now to new highs across the board. Anyone who doesn't think this won't have an impact on leveraged assets like real estate is living in a dream world. 

Noticing a sizeable tick up in mortgage rates the last few days even before this latest increase. 4.5% 5 year fixed are going to be a reality soon, in my opinion.


----------



## MrMatt

doctrine said:


> Interest rates are flying now to new highs across the board. Anyone who doesn't think this won't have an impact on leveraged assets like real estate is living in a dream world.
> 
> Noticing a sizeable tick up in mortgage rates the last few days even before this latest increase. 4.5% 5 year fixed are going to be a reality soon, in my opinion.


No they're not, interest rates are still low by historical standards.
People who overleveraged irresponsibly will get hit, but everyone should have seen this coming.


----------



## james4beach

doctrine said:


> Interest rates are flying now to new highs across the board. Anyone who doesn't think this won't have an impact on leveraged assets like real estate is living in a dream world.


Absolutely. Keep in mind that stocks are liquid, so we can see in real-time how markets change. The same isn't true of real estate. There is no daily "house index" that swings around like crazy, but the fair value of houses is currently falling, as we speak... whether it's on a ticker or not.

Real estate investors need to understand they have been in a highly stimulated environment with huge liquidity injections. Now the reverse is happening -- stimulus and liquidity being taken away. This changes the game, and it's going to affect real estate.


----------



## londoncalling

MrMatt said:


> No they're not, interest rates are still low by historical standards.
> People who overleveraged irresponsibly will get hit, but everyone should have seen this coming.


Of course everyone should have seen it coming. We've been warned about higher rates since the great financial crises. It is very reminiscent of Aesop's fable the boy who cried wolf. Now that rate increases are here people are starting to panic. One should be concerned and re evaluate their situation but there is no need to panice. As you mentioned only those that are over extended will feel the pinch of hikes to normalize interest and inflation rates.

However, if there are any missteps by the fed or we enter an extended recession job losses will result in many people not being able to afford their homes and lifestyle. I am not sure if consumer debt has come down to sustainable levels. Those that were barely making it before will have even more difficulties going forward. There are some bright spots that may stave off recession and its effects for Canada. Low unemployment and commodity prices.


----------



## MrMatt

londoncalling said:


> Of course everyone should have seen it coming. We've been warned about higher rates since the great financial crises. It is very reminiscent of Aesop's fable the boy who cried wolf. Now that rate increases are here people are starting to panic. One should be concerned and re evaluate their situation but there is no need to panice. As you mentioned only those that are over extended will feel the pinch of hikes to normalize interest and inflation rates.


Pre COVID the ultra low rates were quite a discussion, and a LOT of people were refinancing. However in my social group a lot of us were shaking our heads and more focused on reduction.
Our property values are up 3x in 10 years, some people were pulling out all that equity and living it up.

Now that rates are higher, they have a mortgage affordability problem, and their house prices are falling. If too many people are upside down on their homes it could be disasterous.


----------



## Covariance

The next shoe to drop will be those dreaming rates will rapidly come back down.


----------



## james4beach

Covariance said:


> The next shoe to drop will be those dreaming rates will rapidly come back down.


Good point. For all we know, rates could keep going higher for the next 10 years.

I don't think stocks or real estate would perform well in that scenario. GICs would be fabulous though.


----------



## MrBlackhill

james4beach said:


> For all we know, rates could keep going higher for the next 10 years.


Great joke! 😂


----------



## MrBlackhill

james4beach said:


> I don't think stocks [...] would perform well in that scenario.


Have you looked at the performance of stocks and SCV in the 70s?


----------



## james4beach

MrBlackhill said:


> Great joke! 😂


You think it's impossible for interest rates to trend up for the next 10 years?


----------



## james4beach

Covariance said:


> The next shoe to drop will be those dreaming rates will rapidly come back down.


Regime changes can be very hard to deal with. Of course none of us can predict what's going to happen next, but it's possible we could be entering a new regime where rates trend upwards for several years.

Humans have some behavioural habits that we should keep in mind. One is recency bias, expecting patterns of recent years to continue. Another is denial... and unwillingness to adapt to new information and evidence.

But are we entering a new interest rate regime? I have no idea.

Federal Funds futures point to a 2.75% rate by year end. I haven't looked at any interest rate futures beyond that but I'm sure they are into 3% for 2023. That suggests bank prime rates into 5% next year, meaning consumer and corporate borrowing costs in the 8% zone.


----------



## MrBlackhill

james4beach said:


> You think it's impossible for interest rates to trend up for the next 10 years?


Impossible, I can't say that. Highly unlikely though.


----------



## MrBlackhill

james4beach said:


> One is recency bias, expecting patterns of recent years to continue. Another is denial... and unwillingness to adapt to new information and evidence.


I think you are missing one though, the _wealthy-people-with-power-who-don't-like-high-rates_ bias.


----------



## Covariance

james4beach said:


> Regime changes can be very hard to deal with. Of course none of us can predict what's going to happen next, but it's possible we could be entering a new regime where rates trend upwards for several years.
> 
> Humans have some behavioural habits that we should keep in mind. One is recency bias, expecting patterns of recent years to continue. Another is denial... and unwillingness to adapt to new information and evidence.
> 
> But are we entering a new interest rate regime? I have no idea.
> 
> Federal Funds futures point to a 2.75% rate by year end. I haven't looked at any interest rate futures beyond that but I'm sure they are into 3% for 2023. That suggests bank prime rates into 5% next year, meaning consumer and corporate borrowing costs in the 8% zone.


To clarify my earlier comment, there are many who think that the recent move up in rates will quickly be followed by lower rates. I've already seen pundits saying that rates will be down again next year.


----------



## londoncalling

If the US market crashes and they are in a recession rates will certainly be lowered by the Fed. They have different policy drivers than Canada if we can ignore the B of C's failure to raise at the start of the year. I believe we are in for more rate hikes and am optimistic hopeful that both countries can navigate their way out of the low rate party most enjoyed for the better part of a decade without decimating my retirement goals. I don't expect double digit market returns going forward. Mind you I have never expected that.


----------



## james4beach

londoncalling said:


> If the US market crashes and they are in a recession rates will certainly be lowered by the Fed.


But only if inflation readings come down. There is intense political pressure for the central bank to address inflation.

They cannot possibly cut rates while inflation is still running hot, whether or not the stock market crashes. The Federal Reserve could also lose all credibility if they fail to take inflation seriously.

This is what makes the current market so dangerous for stock investors. The previous thinking used to be that any time stocks crash, the Federal Reserve will intervene and boost stocks. But now, there's a good chance that the central bank won't rescue stocks (*there is no Fed put*) because they have to remain tough on inflation.


----------



## londoncalling

If inflation continues to stay in high single digits and the market continues its downward trajectory the north american economy will see tough times for quite awhile. If inflation has peaked this month and returns to a normalized rate I don't expect long term pain. Interest rates should never have been this close to zero for so long. It made for stupide returns and an inflated RE market but in real dollars we are no better off. Some have made out very well but most haven't seen a substantial change to their standard of living as a result. 

I think the Fed will still do what it can to save the market just not with such disregard. There is still a group that believes Wall Street and Bay Street keep things going on main street. To some extent this is true. If businesses don't do well they don't hire. By becoming a consumer driven economy we really have hampered real growth. This tends to happen with maturing economies. Once again, Canada has a better chance this decade to outperform the US if it can sustain employment and immigration to replace a retiring workforce.


----------



## MrBlackhill

I've just been giving a look at the yield curve and no one buys high interests for the long term, as the yield curve is flat. Starting at 5 years and up to 30 years, the yield is the same.

Sure, that flat curve has moved up over time, but I doubt it'll reach higher yields than 4%. We'll get rate hikes, but as time passes by, people will start to expect the end of rate hikes and maybe lower rates for the future, so it'll add even more pressure on the curve.






Canada Government Bonds - Yields Curve


Canada Government Bonds and Yields Curve. Updated charts and tables, agencies ratings, spread comparisons, current prices.




www.worldgovernmentbonds.com














We don't see it on the screenshot, but the 30 years yield is lower than the 20 years yield.


----------



## AltaRed

Some form of stagflation is the real risk going into 2023, i.e. continued high inflation and economic weakness, not unlike the '70s but not as bad since central bankers have lessons learned from that period and better tools today. The reason I say 'some form' is because unemployment won't necessarily be correspondingly high with an upcoming slowdown, but stock prices and corporate profitability will definitely suffer. Market returns could be negative in real terms for some period.


----------



## KaeJS

I would agree that we don't see a long and continued rise of rates.

Higher rates, no more money printing, tapering... All of that plus an economy where retail and consumers are tapped and maxed out, I just can't see it happening for long.

At some point (soon) it will simply slow the economy too much. I think we will see a huge decline in profits and growth from companies. I think stocks and real estate will fall. GDP's will fall. We will be forced to stop and possibly lower rates again quite soon. It won't take very long.

The recession is already here. One just needs to look around.


----------



## AltaRed

Stagflation can be long lasting,as in Investing in the 1970s section of this link. We don't know what it is going to take in interest rate increases, and how long they need to stay high to reduce demand punitively to bring inflation down. I am not as optimistic as you are. Central bankers may engineer a soft landing but I would not bet money on it.


----------



## Covariance

Bank of Canada +50 bps today as expected. Next meeting July 13. Expect another 50


----------



## Ukrainiandude

Covariance said:


> Bank of Canada +50 bps today as expected. Next meeting July 13. Expect another 50


Too little too late.

Nearly half of all Canadians say that they are finding it difficult or very difficult to feed their families amid spiralling inflation that has sent grocery bills skyrocketing, a new survey has found.

The Angus Reid Institute surveyed 1,992 Canadian adults who are members of the Angus Reid Forum about their household finances and what they believe the Bank of Canada should do in response to a rate of inflation which is now at a 31-year high.

It found that 49 per cent of respondents now report finding it difficult or very difficult to feed their families due to food prices that rose 8.7 per cent year-over-year in March.

That number is up from only 36 per cent the last time Angus Reid conducted a similar survey in April, 2019.









Nearly half of Canadians are finding it difficult to feed their families amid spiraling inflation: survey


Nearly half of all Canadians say that they are finding it difficult or very difficult to feed their families amid spiralling inflation that has sent grocery bills skyrocketing, a new survey has found.




www.cp24.com


----------



## KaeJS

Covariance said:


> Bank of Canada +50 bps today as expected. Next meeting July 13. Expect another 50


I'm not so sure.
I think the next hike will be 0.25


----------



## MrMatt

Ukrainiandude said:


> Too little too late.


Not really I think this is an appropriate hike at a reasonable trajectory, by clearly communicating there is a July hike, it should be a good signal.



> Nearly half of all Canadians say that they are finding it difficult or very difficult to feed their families amid spiralling inflation that has sent grocery bills skyrocketing, a new survey has found.


Yes inflation is a huge problem, but hiking rates isn't going to solve it.

Look at Minimum wages, in Ontario in 2017 they were $11.60, today it's $14.25, and now we're seeing comparable inflation.
When they hike it to $15+ this fall ...
You can't expect to hike wages by high single digits without expecting inflation to follow.

Takes and other fees are going up. I don't think I've had a single property tax bill that hasn't increased by more than the stated inflation rate.

Throw in carbon taxes and other things and it's clear direct government policies are pushing up inflation.

Throw in restrictions on home building and real estate prices will also increase faster than inflation.


Interest rates aren't the only thing causing trouble here.


----------



## Ukrainiandude

MrMatt said:


> Not really I think this is an appropriate hike at a reasonable trajectory, by clearly communicating there is a July hike, it should be a good signal.


How I see it. If we got “the cost of living is already at its highest rate in 30 years” we should match this with highest in 30 years interest rates. Simple as that.
You can’t put out a fire by pissing at it.
interest rates 








inflation fire


----------



## MrMatt

Ukrainiandude said:


> How I see it. If we got “the cost of living is already at its highest rate in 30 years” we should match this with highest in 30 years interest rates. Simple as that.
> You can’t put out a fire by pissing at it.


You're not wrong, but if low rates are half of the cause, they're really only half the solution.

Lets say they raise minimum wage by 6%/yr, wouldn't you expect that to put some inflationary pressure of maybe 6%/yr?
No amount of interest rate hikes will lower minimum wage, IT WILL INFLATE.
When the government goes and adds a tax (lets say a Carbon tax to fuel), IT WILL INFLATE the cost of all related delivery services.

The government is by policy pushing higher inflation, at the same time trying to use interest rates to hold it down.

The likely result is that they'll simply give people fewer hours, and people will use less gas (and therefore transport less goods etc), which will slow the economy, at least on the supply side.

When the government is running multiple inflationary policies and programs, inflation is the likely result, and I don't think interest rates alone will limit inflation, at least not without significant harm to the economy as a whole.


----------



## londoncalling

The tone in today's speech was quite hawkish indicating they may raise higher sooner to avoid higher rates longer term. I recently ended up locking in some money that has been sitting in cash into a 1 year redeemable GIC. This gives me the best flexibility to access the money over the next 6 months should rate increases continue at 50 bps or higher. Definitely a better rate than in 2021. I have a rung in my ladder coming due in the fall. When that term matures I will redeem the 1 year redeemable into a likely higher rate if available. I will fill in any missing rungs on the ladder. Not sure if I will deploy the full amount to the ladder, hold some back to pay down the mortgage at renewal, or dump some into equities. A lot of the decision is equity market performance and interest rate related.


----------



## damian13ster

MrMatt said:


> You're not wrong, but if low rates are half of the cause, they're really only half the solution.
> 
> Lets say they raise minimum wage by 6%/yr, wouldn't you expect that to put some inflationary pressure of maybe 6%/yr?
> No amount of interest rate hikes will lower minimum wage, IT WILL INFLATE.
> When the government goes and adds a tax (lets say a Carbon tax to fuel), IT WILL INFLATE the cost of all related delivery services.
> 
> The government is by policy pushing higher inflation, at the same time trying to use interest rates to hold it down.
> 
> The likely result is that they'll simply give people fewer hours, and people will use less gas (and therefore transport less goods etc), which will slow the economy, at least on the supply side.
> 
> When the government is running multiple inflationary policies and programs, inflation is the likely result, and I don't think interest rates alone will limit inflation, at least not without significant harm to the economy as a whole.


Not necessarily 6% by 6%, since middle class is not getting those hikes, but yes - it will increase inflation substantially, and destroy middle class


----------



## Spudd

MrMatt said:


> Look at Minimum wages, in Ontario in 2017 they were $11.60, today it's $14.25, and now we're seeing comparable inflation.
> When they hike it to $15+ this fall ...


Actually, it went to $15 on Jan 1 of this year already, and will go up to $15.50 in the fall.





Minimum wage | Your guide to the Employment Standards Act


Know your rights and obligations under the Employment Standards Act (ESA). This guide describes the rules about minimum wage, hours of work limits, termination of employment, public holidays, pregnancy and parental leave, severance pay, vacation and more.




www.ontario.ca


----------



## Covariance

As a reminder to anyone watching US yields. The Fed started their balance sheet reduction program (QT) on June 1.


----------



## nathan79

MrMatt said:


> You're not wrong, but if low rates are half of the cause, they're really only half the solution.
> 
> Lets say they raise minimum wage by 6%/yr, wouldn't you expect that to put some inflationary pressure of maybe 6%/yr?
> No amount of interest rate hikes will lower minimum wage, IT WILL INFLATE.
> When the government goes and adds a tax (lets say a Carbon tax to fuel), IT WILL INFLATE the cost of all related delivery services.
> 
> The government is by policy pushing higher inflation, at the same time trying to use interest rates to hold it down.
> 
> The likely result is that they'll simply give people fewer hours, and people will use less gas (and therefore transport less goods etc), which will slow the economy, at least on the supply side.
> 
> When the government is running multiple inflationary policies and programs, inflation is the likely result, and I don't think interest rates alone will limit inflation, at least not without significant harm to the economy as a whole.


Minimum wage may have some effect on inflation, though it's very hard to tease apart from regular inflation.

BC minimum wage was frozen from 2001 to 2011 but inflation continued steadily during that time. The minimum wage was finally raised in 2011 to $8.75, then gradually to $13.85 by 2019, but there were no significant changes in the rate of inflation. Inflation only picked up in 2021 due to the fiscal and monetary policy enacted during the pandemic.

The highlighted column in the chart below is the BC CPI for 2001 to 2021. The first column on the left is Canada, while the next two on the right are for Vancouver and Victoria, respectively.

As you can see, no significant difference compared to the rest of Canada either before or after 2011. BC actually had lower inflation than Canada as a whole for much of the period. It only pulled ahead slightly from 2016 to 2020.


----------



## afulldeck

AltaRed said:


> Some form of stagflation is the real risk going into 2023, i.e. continued high inflation and economic weakness, not unlike the '70s but not as bad since central bankers have lessons learned from that period and better tools today. The reason I say 'some form' is because unemployment won't necessarily be correspondingly high with an upcoming slowdown, but stock prices and corporate profitability will definitely suffer. Market returns could be negative in real terms for some period.


Its strange to me that the employment numbers are so good in these conditions. Makes me wonder if corporate profitability might not suffer. Sure things are going up, but more folks can buy them with high employment.....


----------



## james4beach

Covariance said:


> As a reminder to anyone watching US yields. The Fed started their balance sheet reduction program (QT) on June 1.


Thanks, that's a good reminder. We're in a brand new phase of monetary policy now and nobody really knows what's going to happen.

Many economists have expressed concern that, just like the unprecedented QE, there has never been this much QT before in history. This whole thing is experimental, and there is some anxiety about what may happen.

This will remove liquidity from the financial system. We'll have to wait until July to even get a clue about what could be happening.

One guess is: price of all assets goes down, but especially "risk" assets which responded most to the earlier liquidity: stocks (especially tech and growth), crypto koinz, real estate


----------



## doctrine

5 year Canada bond yields are up substantially, almost 0.5%, in the last month, to 3.2%. This is above the US 5 and 10 year bond rates. Mortgage rates are widely expected to tick up and further push towards the 5% mark for 5 year fixed. With variables already at 3.3% with several more rate hikes coming, there won't be many places left to hide.


----------



## Covariance

james4beach said:


> Thanks, that's a good reminder. We're in a brand new phase of monetary policy now and nobody really knows what's going to happen.
> 
> Many economists have expressed concern that, just like the unprecedented QE, there has never been this much QT before in history. This whole thing is experimental, and there is some anxiety about what may happen.
> 
> This will remove liquidity from the financial system. We'll have to wait until July to even get a clue about what could be happening.
> 
> One guess is: price of all assets goes down, but especially "risk" assets which responded most to the earlier liquidity: stocks (especially tech and growth), crypto koinz, real estate


Next shoe just dropped - Euro CB just announced an increase in their rate - first increase in a decade


----------



## james4beach

Covariance said:


> Next shoe just dropped - Euro CB just announced an increase in their rate - first increase in a decade


Yes, amazing!

The two main sources of global liquidity until now were the Federal Reserve and ECB. The Fed has already said very clearly that it's going to drain liquidity, but now the ECB will be doing it too, which means global liquidity is drying up.

The only big question remaining is how much of this is central bank posturing. Will they really keep raising rates even as economies slow, and real estate falls? For example it's widely believed that the Bank of Canada will never let real estate fall. Some analysts are already saying that the BoC rate cannot exceed 2.5% because it will hurt housing.

I'm not sure. The Bank of Canada is sounding tough about inflation and rates, but I still suspect they have a strong cultural / institutional bias towards supporting housing (a national sickness), and I'm not sure I believe their words. Let them raise to 4% and prove me wrong.


----------



## Covariance

james4beach said:


> Yes, amazing!
> 
> The two main sources of global liquidity until now were the Federal Reserve and ECB. The Fed has already said very clearly that it's going to drain liquidity, but now the ECB will be doing it too, which means global liquidity is drying up.
> 
> The only big question remaining is how much of this is central bank posturing. Will they really keep raising rates even as economies slow, and real estate falls? For example it's widely believed that the Bank of Canada will never let real estate fall. Some analysts are already saying that the BoC rate cannot exceed 2.5% because it will hurt housing.
> 
> I'm not sure. The Bank of Canada is sounding tough about inflation and rates, but I still suspect they have a strong cultural / institutional bias towards supporting housing (a national sickness), and I'm not sure I believe their words. Let them raise to 4% and prove me wrong.


And also today the BOC released their review of major risks. Residential real estate front and centre. Market reaction is the BOC will take it easy. CAD off against major currency pairs.









Financial System Review—2022


The Canadian financial system remains resilient, but vulnerabilities have become more complex and risks have grown. The Bank is carefully watching households’ high levels of mortgage debt, as well as the risks associated with a price correction in Canada’s housing market.




www.bankofcanada.ca


----------



## james4beach

Covariance said:


> And also today the BOC released their review of major risks. Residential real estate front and centre.


Makes me wonder when the BoC is going to chicken out. Maybe at 2.0% policy rate? Honestly, these guys are spineless.

That's why everyone was so shocked by Volcker. Nobody really thought a central banker could ever raise rates that aggressively.


----------



## MrMatt

james4beach said:


> Makes me wonder when the BoC is going to chicken out. Maybe at 2.0% policy rate? Honestly, these guys are spineless.
> 
> That's why everyone was so shocked by Volcker. Nobody really thought a central banker could ever raise rates that aggressively.


The thing is with the big inflation numbers, that's going to drive a lot of other benefits and spending, which will have even more inflationary pressure.

Unless the government wants to slash spending, interest rates won't be enough, and Real estate, particularly residential RE is going to get hammered.
These conflicting policies are a disaster. No I don't know the solution, but we have a mess right now.


----------



## damian13ster

The solution isn't that complicated - get smarter, fiscally responsible people in charge. The problem is you need to have at least 40% of voting society be smart and fiscally responsible. Canada doesn't pass that threshold so the fix has to be long term - fix our education system.
The caveat - the dumbasses in charge don't have incentive to increase financial education in society because financial illiterates are their electorate.


----------



## sags

Regardless of what happens....life will carry on, although after a nuclear war, supervolcano eruption, or meteor strike.....it might not be human life.


----------



## londoncalling

Anybody else sense the irony in central bankers warning everyone to control their debt levels while governments keep piling on the debt. I know the branches are separate but it reeks of "do as I say not as I do..." philosophy.


----------



## damian13ster

londoncalling said:


> Anybody else sense the irony in central bankers warning everyone to control their debt levels while governments keep piling on the debt. I know the branches are separate but it reeks of "do as I say not as I do..." philosophy.


Not really. Central bankers don't have much control over fiscal policy - that's on government.
Central bankers can only start raising rates - imho they should raise them high enough that treasuries yield goes up to the level in which new bonds simply won't be issued and government will have no choice but to rein in spending.

That's what it takes to control inflation and that's central bank's job, so stop political pampering, be independent institution, and do it.


----------



## londoncalling

Fiscal policymakers have been notorious for warning consumers about not overextending themselves in real estate while maintaining housing bubble friendly legislation with many of the reaping the benefits of an inflated RE market all the while. Not sure how one can suck and blow at the same time but I guess if you talk out both sides of your mouth anything is possible. It took several decades to create the bubble now let's see if it deflates or pops. Maneuvering out of this mess without a major and prolonged recession will be an impressive feat Macklem and co. Similar results from Powell and the fed will require even more skill/luck as we have a larger portion of our economy that benefit from inflation to help keep the economy going during tightening phases.


----------



## james4beach

londoncalling said:


> Fiscal policymakers have been notorious for warning consumers about not overextending themselves in real estate while maintaining housing bubble friendly legislation with many of the reaping the benefits of an inflated RE market all the while. Not sure how one can suck and blow at the same time


Absolutely, very true!

They warned consumers, saying "tsk, tsk, don't take too much debt" while simultaneously providing the cheapest mortgage rates in history.

If the government and central bank was serious about not letting consumers over-extend themselves, they would not permit low downpayment mortgages, wouldn't have so much CMHC stimulus, and wouldn't keep rates near 0% for so long.


----------



## james4beach

This is kind of hilarious. On the evening news, the first story was about how rising interest rates are going to cause problems for all the people who took mortgages at record low rates. Lots of worried homeowners.

The second story? People still have trouble finding items, for all their home renovations and furnishings.

You've gotta be kidding me! The homeowners are greedily using those historically low mortgage rates, and blowing the money on luxury renovations and home furnishings.


----------



## MrBlackhill

james4beach said:


> they would not permit low downpayment mortgages, wouldn't have so much CMHC stimulus, and wouldn't keep rates near 0% for so long.


I don't think low down payment is an issue. The issue comes from the fact that people can buy a property as an investment, combined with low supply.

I don't think "keeping rates low" is an issue. Again, the issue comes from the fact that people can buy a property as an investment, combined with low supply.

House prices have increased in part due to rates going down, not because rates were "kept low". Rates going down from 15% to 10% would make the house prices go up, yet neither of those rates are "low". All other things equal and well balanced, if rates were steady, no matter if it's steady at 10%, 5% or 2%, prices wouldn't move up (or down), in real terms.

Obviously, if you allow people to buy a property as an investment AND the required down payment is low AND the rates are low, then the *combination* is a recipe for disaster which will inflate property price due to that advantageous leverage for the investor, but the root cause of this is due to allowing people to buy properties as an investment. And other factors like the lack of supply, which again, people buying properties as an investment are contributing to that lack of supply, because they are buying properties and condos meant to be owned, and then renting them, while there's a demand from families who wish they could own, not rent.

It seems to me that the real issue comes from allowing people to buy as an investment. A house should not be rented. And for big buildings, if a promoter built a 100-unit building in order to sell each condo, then the people buying should be living there, not renting it to other people. And the other big issue is the lack of supply, with all the reasons why we have a lack of supply (NIMBY, zoning, lack of investment in projects to build more housing, etc.). And maybe another issue is that everybody wants to live in the same few cities where jobs are, so we need to help entrepreneurs to build their businesses in other, smaller cities, to help those cities flourish as people find more job opportunities in those smaller cities.


----------



## scorpion_ca




----------



## sags

After the US inflation numbers were announced, there is a shift in sentiment that the Fed needs to "shock" the system with a 1% increase.


----------



## MrMatt

james4beach said:


> This is kind of hilarious. On the evening news, the first story was about how rising interest rates are going to cause problems for all the people who took mortgages at record low rates. Lots of worried homeowners.
> 
> The second story? People still have trouble finding items, for all their home renovations and furnishings.
> 
> You've gotta be kidding me! The homeowners are greedily using those historically low mortgage rates, and blowing the money on luxury renovations and home furnishings.


Because ... people are stupid.

This isn't news it's also why I want them to leave me alone, they're dumb and they make bad decisions.


----------



## sags

The steady drip may not be enough to put the brakes on inflation.

It sounds like the BOC is willing to sacrifice overstretched consumers.


----------



## Beaver101

sags said:


> The steady drip may not be enough to put the brakes on inflation.
> 
> It sounds like the BOC is willing to sacrifice overstretched consumers.


 ... imagine seeing the prime rate go to 5% by the end of July. And then 6% by end of September. And then 7% by year end. I wonder if this will be enough for a 2022 recession?


----------



## Covariance

Canada employment was released this morning as well (as US inflation). Jobs added beat consensus and unemployment was lower then expected. The Canadian central banker would take that as licence to keep going.


----------



## Ukrainiandude

Covariance said:


> The Canadian central banker would take that as licence to keep going.


When do you reckon they gonna start?


----------



## Covariance

US Fed +75 bps today.


----------



## scorpion_ca

Covariance said:


> US Fed +75 bps today.


Any guidance for the next couple of months?


----------



## Covariance

scorpion_ca said:


> Any guidance for the next couple of months?


50 or 75 at the next meeting (July 27)

Over 3% by the end of the year.


----------



## potato69

Personally this brings a lot of relief. I feel like I've been living in crazy land with how the Canadian RE market has been going for the last 10 years. I've been a firm believer that the housing market only makes sense at extremely low interest rates. If you think they will never go up then you're good. If you think they might - who knows when, then RE has been a highly risky investment.

Anyway, this belief has made me look and feel like a moron that last decade. I'm hoping for some vindication.


----------



## KaeJS

potato69 said:


> Personally this brings a lot of relief. I feel like I've been living in crazy land with how the Canadian RE market has been going for the last 10 years. I've been a firm believer that the housing market only makes sense at extremely low interest rates. If you think they will never go up then you're good. If you think they might - who knows when, then RE has been a highly risky investment.
> 
> Anyway, this belief has made me look and feel like a moron that last decade. I'm hoping for some vindication.


I'm sure you'll get the vindication you're looking for. Give it a year or 2.


----------



## damian13ster

I would be surprised if in 2 years interest rates aren't down to <1% sadly


----------



## scorpion_ca

damian13ster said:


> I would be surprised if in 2 years interest rates aren't down to <1% sadly


I agree. Federal election will be held in 2025. Liberal wants to flood the markets with free money before the election.


----------



## Gator13

I've noticed a number of headlines regarding companies laying off staff. Wealth Simple 13%, Hexo 450, Coinbase 18%, Tesla 10%, TomTom 500, BBC 1000, Uber, Meta, Aliexpress......

Could be a bumpy road ahead.


----------



## james4beach

damian13ster said:


> I would be surprised if in 2 years interest rates aren't down to <1% sadly


Very possible, and it's one reason I keep saying that bond investors shouldn't try to time interest rates.

If you hold XBB today you're getting 4.1% yield. Same reason one shouldn't avoid the 5 year GICs which are now around 4.5% yield. If your time horizon is long enough, you should be doing long term fixed income investments. We never know where interest rates will go.


----------



## Covariance

Base case for BOC now +75 at July meeting.


----------



## AltaRed

It currently appears central bankers are determined to get inflation under control. Assuming they continue to have the backbone to do so and don't blink when the going gets tough, this will be a great opportunity to flush all the excesses out of the system. 

There is a need for a great cleansing whack-a-moling all those who took out HELOCs for grandiose home renovations and leveraged* stock market investing, those who have been speculating with pre-construction contracts on the premise condo market values had nowhere to go but up, etc, etc. Every now and then, the overly ambitious and extended smart a**es need their heads handed back to them. This one has been 10 years in the making. May the next 1-2 years be a time for the 'great reset'. 

Lest those comments sound too vindictive, I do hope that not many will lose their principal residences in this process. Only that they get the appropriate number of lashes to reset their lifestyles to live within their means. .

* I have not yet seen much written about folks struggling with margin calls. Perhaps the situation is not as bad as I thought it might be.


----------



## scorpion_ca

@AltaRed - If I am not mistaken, you buy VEQT in all of your accounts. I am done contributing to my registered accounts. I am thinking to start contributing to my non-registered account and buy XEQT there. I am not sure if I will be paying more foreign taxes if I buy XEQT in my non-registered account or should I just buy Canadian equities such as VCN or XDIV?


----------



## AltaRed

I only buy VEQT in my TFSA and VCNS in my RRIF. I accept the loss of foreign withholding taxes because it is not material to intent nor return.

You really won't pay more taxes owning VEQT or XEQT in your non-registered accounts than you would by holding the component ETFs individiually. Any foreign tax withheld will show on your T3 tax slip and be a foreign tax credit on your tax return.


----------



## james4beach

AltaRed said:


> It currently appears central bankers are determined to get inflation under control. Assuming they continue to have the backbone to do so and don't blink when the going gets tough, this will be a great opportunity to flush all the excesses out of the system.
> 
> There is a need for a great cleansing whack-a-moling all those who took out HELOCs for grandiose home renovations and leveraged* stock market investing, those who have been speculating with pre-construction contracts on the premise condo market values had nowhere to go but up, etc, etc. Every now and then, the overly ambitious and extended smart a**es need their heads handed back to them. This one has been 10 years in the making. May the next 1-2 years be a time for the 'great reset'.


I completely agree with you on all parts of this.

However, let's keep in mind that they might chicken out, which is an important reason to also maintain exposure to your various assets (especially stocks) because if the CBs chicken out, these assets may be your only protection from continuing runaway inflation.

Some investors these days will be tempted to dump their assets and go to cash. But then, >> if << the CBs fail to follow through, those cash investors will be absolutely screwed.


----------



## AltaRed

I am not changing anything in my portfolio. I didn't in any of the prior market implosions and don't intend to do so now. I won't like it but if we had another 2008 style event, one needs to remember the S&P500 peaked in Oct 2007, hit bottom in Mar 2009 and didn't return to its prior peak until about Oct 2013.... 6 full years later (dividends not included). Investors need to consider that as a real possibility, notwithstanding they'd be collecting dividends in the meantime.


----------



## Ukrainiandude

AltaRed said:


> I am not changing anything in my portfolio. I didn't in any of the prior market implosions and don't intend to do so now. I won't like it but if we had another 2008 style event, one needs to remember the S&P500 peaked in Oct 2007, hit bottom in Mar 2009 and didn't return to its prior peak until about Oct 2013.... 6 full years later (dividends not included). Investors need to consider that as a real possibility, notwithstanding they'd be collecting dividends in the meantime.


The real question here’s *“Will equity markets ever reach their previous highs again in our lifetime?”*


----------



## AltaRed

I suppose it depends on your best before date. I have no doubt about if for myself (10 years, maybe 15). A lot of poo can be flushed in 5-10 years.


----------



## Ukrainiandude

AltaRed said:


> I suppose it depends on your best before date. I have no doubt about if for myself (10 years, maybe 15). A lot of poo can be flushed in 5-10 years.


I like your optimism. Although if you look at infamous Japanese Nikkei 225, at hasn’t reached its ATH from years ago. 
I know, I know NA market is a totally different animal.


----------



## MrBlackhill

Ukrainiandude said:


> I like your optimism. Although if you look at infamous Japanese Nikkei 225, at hasn’t reached its ATH from years ago.
> I know, I know NA market is a totally different animal.


I like your pessimism, but when there's a bubble situation, I look at it the other way around.

Take NASDAQ for instead. One could argue NASDAQ took 15 years to recover... Obviously, when we're looking at the peak of a bubble, it'll take a long time to reach that again. And, sure, if you dumped a huge lump sum in 2000, it took 15 years to recover. But if you look at the bottom of the bubble crash in 2002, it has erased only 6 years of gains because in 2002 we were still higher than 1996 and earlier. I could even say that it erased only 4 years of _gains_ because 1996-2000 was the period of gains, then it was the bear start.

About Japan, I can't deny that its index is choppy since 1992, though I haven't checked the dividend effect, but anyways, the bubble that peaked in 1990 arguably bottomed in 1992, which was erasing gains last seen in 1986, so only 6 years. To me, 1986-1992 is one story, then post-1992 is another story.


----------



## londoncalling

Although it is possible that we see a Japan like recovery due to slower growth that comes from a maturing economy, we do have some differences. Namely, commodities to extract and export and room increase population and productivity through immigration. Japan had a much larger population density that did not encourage further population growth an aging population and declining birth rate which resulted in a lost generation that never found employment. It is possible to happen to us but less likely. 

I don't expect a quick recovery like we saw in 2020 or even a sharp V. More likely a long drawn out bear with high unemployment. I will also note that I am great at making predictions. However, I am not very good at getting them right.  That's why I buy throughout all market conditions. Anyone who got through 08 knows that this to shall pass.


----------



## AltaRed

Population growth matters a lot to GDP growth and thus market growth. It is not a coincidence that Japan's historical population growth rate pretty much mirrors their stock market performance. One could apply the same logic to a number of European countries.


----------



## james4beach

Ukrainiandude said:


> The real question here’s *“Will equity markets ever reach their previous highs again in our lifetime?”*


I'm confident they will, as long as you're diversifying between countries.

For example I think it shouldn't take too long for XAW or VEQT to reach new all time highs. Maybe within 5 to 10 years? It could be a rough few years though.

I also think the TSX should bounce back pretty nicely. Canada's valuations were lower than the US when all this started.


----------



## Covariance

james4beach said:


> I completely agree with you on all parts of this.
> 
> However, let's keep in mind that they might chicken out, which is an important reason to also maintain exposure to your various assets (especially stocks) because if the CBs chicken out, these assets may be your only protection from continuing runaway inflation.


Focusing on Fed and other CBs changing their tune. They will of course pause at some point. Now through September I expect them to get to their neutral range (~~2.5%) as quickly as possible as long as inflation stays hot. This is logical and symbolic. A policy rate below the neutral range is stimulative, and therefore contributes to inflationary pressure as it is still stimulating demand. Not a position they want to be in. Once they are at neutral they have far more flexibility on the pace and quantum of further rate changes.


----------



## james4beach

Covariance said:


> I expect them to get to their neutral range (~~2.5%) as quickly as possible


Well I thought the Fed was anticipating a 3.25% ish rate by year end

But I'm not sure how they can claim rates like 2% to 3% are "neutral" when inflation is running at 8.6%. Wouldn't a more reasonable estimate of neutral be something like a 5% to 6% fed funds rate?


----------



## AltaRed

Neutral is what provides the long term balance of 2-3% inflation over longer periods of time. They will have to overshoot to tame current inflation but they will then need to back off thereafter. Real short term rates generally are just marginally positive.


----------



## Gator13

^ As above

A Neutral level for interest rates is the point where the rate does not promote expansion or contraction.


----------



## kcowan

The good news is that we re unlikely to hit 20% like 1980?

Especially since I had $500k in bridge financing then.


----------



## Covariance

TD HISA now 1.25%, US 1.00.


----------



## Thal81

Canada inflation data for May is coming out this week. It's projected to be somewhere between 7 and 7.5% depending on where you look. It's not going in the right direction.


----------



## bigmoneytalks

AltaRed said:


> I am not changing anything in my portfolio. I didn't in any of the prior market implosions and don't intend to do so now. I won't like it but if we had another 2008 style event, one needs to remember the S&P500 peaked in Oct 2007, hit bottom in Mar 2009 and didn't return to its prior peak until about Oct 2013.... 6 full years later (dividends not included). Investors need to consider that as a real possibility, notwithstanding they'd be collecting dividends in the meantime.


This is why you should buy during these periods because once it goes back to the peak, you gains should be much higher if you sat and did nothing.....buying right now. Bought when it was 10% under and now buying when it's 20% under...when it recovers,.I should be much further ahead


----------



## AltaRed

Doesn't work when one is drawing down one's portfolio in my now 17th year of retirement and counting on my cash wedge to tide me through the next year or two.


----------



## MrMatt

AltaRed said:


> Doesn't work when one is drawing down one's portfolio in my now 17th year of retirement and counting on my cash wedge to tide me through the next year or two.


Thats why I'm looking at my allocations and plans now, years out from retirement.
I want to have a good plan in place LONG before decision time.


----------



## AltaRed

In portfolio draw down, it is a balance of having enough cash wedge to provide some cash flow wiggle room and sleep-at-night factor, versus not too much as to be a material drag on the portfolio. There probably is an analytical quantum computing answer to this somewhere but it still would not address 'just right' for the individual. 

What I suspect is NOT a right answer is having cash drag waiting for an opportunity to 'buy low' when securities are on sale. Correction (or bear) sized buying opportunities don't come around with any predictable certainty.


----------



## james4beach

AltaRed said:


> What I suspect is NOT a right answer is having cash drag waiting for an opportunity to 'buy low' when securities are on sale. Correction (or bear) sized buying opportunities don't come around with any predictable certainty.


I completely agree. An investor needs to stay nearly fully invested at all times. It's a really bad idea to cash out and then wait for the big correction in stocks... it may or may not come. It just can't be predicted with any accuracy.

I also have a cash wedge/buffer for withdrawals during tough times like today. I implement mine a bit differently, using a GIC ladder within my fixed income component. The GICs provide enough liquidity that I can withdraw and live off that cash. Same basic idea though.


----------



## MrMatt

james4beach said:


> I completely agree. An investor needs to stay nearly fully invested at all times. It's a really bad idea to cash out and then wait for the big correction in stocks... it may or may not come. It just can't be predicted with any accuracy.


No, but the cost of having a bond position and rebalancing isn't too bad.


----------



## Covariance

Base case BoC next meeting; +75bps. [Alternative scenario +100bps at 10% probability]


----------



## MrBlackhill

What's this smell? Is it the smell of a recession?

3 more hikes max.















Canada Government Bonds - Yields Curve


Canada Government Bonds and Yields Curve. Updated charts and tables, agencies ratings, spread comparisons, current prices.




www.worldgovernmentbonds.com


----------



## KaeJS

Recession for sure. It's already here. Most people outside this forum just don't see it yet.

But it's already happened.


----------



## MrMatt

KaeJS said:


> Recession for sure. It's already here. Most people outside this forum just don't see it yet.
> 
> But it's already happened.


It's not going to get better for a while unfortuately.

Bad policy is a BIG part of why we're here, and I can't imagine that they won't introduce a bunch more to "fix" the problem.


----------



## Covariance

Reversion to the mean.


----------



## Juggernaut92

More stuff will be on sale. Although energy stocks may remain elevated because of the energy bull run.


----------



## damian13ster

Energy stocks are actually looking quite attractive thanks to the massive drop in oil price.
The supply/demand hasn't changed. The underlying issues in energy markets might not change for next decade.
Current valuations are attractive even with oil price being around 80$ on average, and it is hard to see the price dropping significantly below that


----------



## MrBlackhill

People are so happy to see house prices dropping a bit... Do they know the maths?

Say we've reached a -20% drop now that rates increased... Oh, "now that rates increased" also means the 5-year fixed mortgage is a 4.1%, but in 2020 you could get a 5-year fixed at 1.4%.

Say you have $100,000 for down payment, comparing a house at $500,000 in 2020, now at $400,000, so the mortgage would be on $400,000 vs $300,000

$400,000 at 1.4% is pretty much the same monthly mortgage cost as $300,000 at 4.1%

But after 5 years, you'll have paid $69,000 in principal in the first case (17.25% of your balance) and $38,000 in principal in the second case (12.67% of your balance)


----------



## MrMatt

MrBlackhill said:


> People are so happy to see house prices dropping a bit... Do they know the maths?


I thought it was obvious people didn't know math.

Financial literacy is pathetic.
I would say crisis, but that's so overused.

Also I'm glad that home prices are dropping, they're too high. 
Of course crazy high prices also spur investment to build more homes, which will help the housing shortage. So from that perspective I'm not happy.


----------



## m3s

Ultra low rates are just as destructive and unsustainable as high rates

You should have to pay a reasonable rate to borrow money, and you should be rewarded a reasonable amount to save/lend money. The low rates gave us massive debt loads and wild speculation. It's a drug for the government because it increases taxes without upsetting the masses. People think they are rich when really it's just inflation and stealth tax raises

Repairing this backwards economy will be very painful. Thanks boomers


----------



## AltaRed

It has little to do with boomers alone. Everyone accessing cheap money they want to spend on goods and services and housing has jumped on board both the asset inflation and indebtedness ships. It's been gov'ts catering to the Gen-X and Millennial house buying crowd in the last two decades that has been highly responsible for house price appreciation. The dolts simply increased demand by easing acquisition costs, i.e. mortgage rates, amortization period, down payments, home buying programs, etc, etc. Every single incentive to make housing supposedly affordable simply increased demand and thus home prices. Almost nothing was done to stimulate supply.


----------



## nathan79

MrMatt said:


> I thought it was obvious people didn't know math.
> 
> Financial literacy is pathetic.
> I would say crisis, but that's so overused.
> 
> Also I'm glad that home prices are dropping, they're too high.
> Of course crazy high prices also spur investment to build more homes, which will help the housing shortage. So from that perspective I'm not happy.


Or they've done the math and lower prices work better for them. Not everyone is taking a large mortgage (or any mortgage). Someone who has the minimum down payment will have much different math than someone who has a large down payment.


----------



## MrMatt

m3s said:


> Repairing this backwards economy will be very painful. Thanks boomers


You realize it's the young people who put Trudeau in power, right?


----------



## Gator13

There is another important point that is not getting much coverage. The higher interest rates are going to have a massive impact on Canada's debt payments. The near zero interest rates have allowed the Liberals even more latitude to spend like drunken sailors. Canada's annual deficit is going to balloon as rates go up.


----------



## m3s

AltaRed said:


> It has little to do with boomers alone.


Whether or not they catered to millennials and gen x, which is laughable, the boomers were the adults making the decisions. I imagine they catered to financial incentives. Everything is driven by financial incentives

You can't blame people for spending cheap money. I'd argue it is not Trudeau or the consumers but the central banks who set monetary policy and interest rates. Who made the decisions that led us down this path



MrMatt said:


> You realize it's the young people who put Trudeau in power, right?


I disagree that young people put Trudeau in power but it doesn't matter because low interest rates pre-date Trudeau by a long shot anyways


----------



## MrMatt

m3s said:


> I disagree that young people put Trudeau in power but it doesn't matter because low interest rates pre-date Trudeau by a long shot anyways











Liberals Won Majority Thanks To Young Voters, Poll Suggests


And millennials could be the biggest voting group in 2019.




www.huffpost.com




Forty-five per cent of Canadians aged 18 to 25 voted Liberal, compared with 25 per cent for the NDP and 20 per cent for the Conservative Party, the online poll of 1,000 suggests. 

Yeah, Trudeau is the fault of young people.

The problem is FAR more widespread than just interest rates.


----------



## m3s

MrMatt said:


> Forty-five per cent of Canadians aged 18 to 25 voted Liberal, compared with 25 per cent for the NDP and 20 per cent for the Conservative Party, the online poll of 1,000 suggests.


These polls are notoriously poor and misleading

For example it doesn't matter if 99% of self-reported "Canadians aged 18-25" voted for Spongebob Squarepants in a random internet poll of 1,000 suggests if 50% of actual Canadians aged 18-25 didn't actually vote for anything in the actual vote

Trudeau has little impact on the interest rate issue anyways and interest rates do indeed drive the entire economy. Just watch what happens to markets whenever central banks change direction


----------



## AltaRed

@m3s: You appear to have an unhealthy? obsession about boomers. ISTM repeated commentary of that nature over the past few years undermines objectivity and credibility you could otherwise bring to the discussion. Most government and central bank policy in recent times has been made by Gen-Xers. The youngest boomers are already 58 years old and the oldest ones in their late 70s no longer have much stake in the game.

The folks predominantly taking out auto loans and lines of credit are younger than boomers. Most boomers are most likely indifferent. As stated by others, it is the Gen-Xers and Millennials mostly voting in 'tax and spend' Liberals and NDPers so the programs being played in the housing game are targeted to those demographics. I don't know about HELOCs but I suspect it is mostly Gen-Xers and perhaps boomers. A substantial reset of house prices and interest rates will fix that over the next year or two.

All of our children are Gen-Xers or Millennials so we have a pretty good idea what these cohorts are doing.


----------



## MrMatt

m3s said:


> These polls are notoriously poor and misleading
> 
> For example it doesn't matter if 99% of self-reported "Canadians aged 18-25" voted for Spongebob Squarepants in a random internet poll of 1,000 suggests if 50% of actual Canadians aged 18-25 didn't actually vote for anything in the actual vote
> 
> Trudeau has little impact on the interest rate issue anyways and interest rates do indeed drive the entire economy. Just watch what happens to markets whenever central banks change direction


Well I think government policy can and often does have a far larger impact than interest rates.

Lets take some examples.
COVID, the government turned off a significant portion of the businesses in the country, big impact.
9/11, massive economic shock
Ask Ukraine or Russia on how interest rates are affecting their economy.

Interest rates may be one of the most significant single tools, but it's just one of many.


----------



## MrBlackhill

MrBlackhill said:


> $400,000 at 1.4% is pretty much the same monthly mortgage cost as $300,000 at 4.1%
> 
> But after 5 years, you'll have paid $69,000 in principal in the first case (17.25% of your balance) and $38,000 in principal in the second case (12.67% of your balance)


Counter argument to my point is that even though you paid fewer interests and more of your principal with a mortgage at 1.4% but higher house price, you still have more debt because in the first case after the 5-year term you still have $331,000 left on the mortgage and you'll renew at a likely higher rate, while in the second case you are left with $262,000 on the mortgage and maybe you'll renew at lower rate.

But then a counter-counter argument would be to take more things into account like how much money you've lost paying a rent over the past 2 years, etc.


----------



## sags

Gator13 said:


> There is another important point that is not getting much coverage. The higher interest rates are going to have a massive impact on Canada's debt payments. The near zero interest rates have allowed the Liberals even more latitude to spend like drunken sailors. Canada's annual deficit is going to balloon as rates go up.


Very true, but it was my understanding from past budget speeches that Canada restructured the debt to longer terms at record low interest rates.

I read that even after the pandemic spending applied to the debt, the servicing costs were lower than the pre-pandemic cost.

How long the new terms are in effect would be a relevant question.


----------



## peterk

MrBlackhill said:


> People are so happy to see house prices dropping a bit... Do they know the maths?
> 
> Say we've reached a -20% drop now that rates increased... Oh, "now that rates increased" also means the 5-year fixed mortgage is a 4.1%, but in 2020 you could get a 5-year fixed at 1.4%.
> 
> Say you have $100,000 for down payment, comparing a house at $500,000 in 2020, now at $400,000, so the mortgage would be on $400,000 vs $300,000
> 
> $400,000 at 1.4% is pretty much the same monthly mortgage cost as $300,000 at 4.1%
> 
> But after 5 years, you'll have paid $69,000 in principal in the first case (17.25% of your balance) and $38,000 in principal in the second case (12.67% of your balance)



What maths are you on?? lol

So you'd rather make the same payment and have:

500,000-69000 = 431,000 remaining mortgage
Vs.
400,000-38,000 = 362,000 remaining mortgage

And you'd take the 1st one because you paid less interest to the bank?


----------



## MrBlackhill

peterk said:


> What maths are you on?? lol
> 
> So you'd rather make the same payment and have:
> 
> 500,000-69000 = 431,000 remaining mortgage
> Vs.
> 400,000-38,000 = 362,000 remaining mortgage
> 
> And you'd take the 1st one because you paid less interest to the bank?


Yes, I replied the counter arguments to myself in post #460

And it's $400,000 - $69,000 = $331,000 and $300,000 - $38,000 = $262,000 because in my example I used $500,000 vs $400,000 houses but with $100,000 own payment, so $400,000 vs $300,000 mortgages.

But how much have those people paid (lost) in rent over the past 2 years? $60,000? More?

Arguably we could still say that the lower house price, higher mortgage rate was the better option, but that's just a fictive example of mine. Take in more variables into account, each very sensitive, and you end up winning even with high house price and low mortgage rate. Obviously with rates dropping so low, prices overshot, but if rates go up to high, you will also end up on the losing side even if price drops.


----------



## bigmoneytalks

MrMatt said:


> You realize it's the young people who put Trudeau in power, right?


Correct. I voted for cannabis not this!


----------



## AltaRed

@MrBlackhill: That is the problem with housing affordability. Those with vested agendas, e.g. house prices are now 10 times earnings type stuff, use data mining to make their point. Ultimately, affordability is a relationship of market prices vs mortgage interest rate. Affordability is always a messy uneasy equilibrium.... rates go up and prices go down, and vice versa. I've had to give up with the explanations to folks who don't want to get the math. Instead, Ottawa has, over the years, kept increasing demand (and thus prices) with poor housing policies.


----------



## m3s

bigmoneytalks said:


> Correct. I voted for cannabis not this!


At least he delivered on one promise

Never mentioned electoral reform again


----------



## londoncalling

Electoral reform is always the policy of those seeking power not the ones holding power. Once elected the extent of reform is done through redrawing the electoral boundaries to carve out a greater probability of winning more seats. I am aware that the remapping is done by Elections Canada and therefore not a direct act of the government. However, there does seem to be a trend in carving up strongholds in the remapping. Especially on the fringes of urban rural ridings. 

Electoral district (Canada) - Wikipedia


----------



## AltaRed

I don't believe there is any material political interference. EC asks affected stakeholders to comment on proposed electoral district boundaries. Our local boundaries are changing and EC has asked everyone in the districts to comment to see if a proposed boundary makes sense, e.g. through a housing subdivision rather than between subdivisions or along river courses, etc. I think EC looks at the boundaries after each census. BC, AB and ON are growth provinces and usually always get a few more seats. There are a few anomalies guaranteed by the constitution, e.g. in the Maritimes and for Quebec, and allowances are made for very sparsely populated regions. So it will never be true representation by population but it is as fair as can be done in my opinion.

Nothing remotely like the gerrymandering that goes on in the USA where I don't know how they can even say they are a functioning democracy. If the USA model is model democracy, then democracy is hooped.


----------



## james4beach

Cliff Asness of AQR says

"I think the Fed probably fears recession more than they fear inflation. They fear both. Historically ... most macro economists think that if we really have to, we know how to kill inflation. It usually will bring on a worse recession and you only do that as a last resort (Volcker is the ultimate example)"


----------



## MrBlackhill

james4beach said:


> Cliff Asness of AQR says


I also like the first part of the video where he talks about avoiding bonds.


----------



## Thal81

A 0.75% rate hike in July is now pretty much baked in, and some economists are talking about the possibility of a full 1% hike. Here's an interesting article:
Bloomberg Article
I think my next BoC rate poll is going to be interesting!


----------



## londoncalling

AltaRed said:


> I don't believe there is any material political interference. EC asks affected stakeholders to comment on proposed electoral district boundaries. Our local boundaries are changing and EC has asked everyone in the districts to comment to see if a proposed boundary makes sense, e.g. through a housing subdivision rather than between subdivisions or along river courses, etc. I think EC looks at the boundaries after each census. BC, AB and ON are growth provinces and usually always get a few more seats. There are a few anomalies guaranteed by the constitution, e.g. in the Maritimes and for Quebec, and allowances are made for very sparsely populated regions. So it will never be true representation by population but it is as fair as can be done in my opinion.
> 
> Nothing remotely like the gerrymandering that goes on in the USA where I don't know how they can even say they are a functioning democracy. If the USA model is model democracy, then democracy is hooped.


Definitely nowhere near level of gerrymandering taking place as the US but I typically don't hold the US as a shining example of a stellar political system. Increasing the number of seats due to population is definitely the right thing to do. Perhaps I am reading too much into it but I find that when the boundaries are redrawn, ridings that are shuffled geographically tend to carve out ridings that result in constituents that all vote the same way. Again, I haven't researched to confirm such is the case and has been more of an observation over the years with input from some associates in the bureaucracy. The recent federal election is a poor example as we saw regional voting for the most part similar to the 90s. I understand we will likely never see true rep by pop(I think it would create a greater imbalance for the territories and Maritimes) and the majority of the voting power still lies in the larger populated provinces.


----------



## james4beach

MrBlackhill said:


> I also like the first part of the video where he talks about avoiding bonds.


As an active manager, he does want to avoid bonds. You can go that route but then the question becomes: when do you get back in?

Remember, these CNBC guests are active managers (this guy runs a hedge fund). He's not saying avoid bonds in the long term, he's saying avoid them for now _until his opinion changes again. _In 6 months he might be saying something different.


----------



## Thal81

I've noticed a significant downward trend in interest rates expectation over at the TMX website. A month ago the market was pricing in a solid 3% BoC rate by December, and up to 3.5% in early 2023. Now they think it's going to be about 2.5% by December, and drop somewhere between 2 and 2.25% by mid 2023. Heck, even the 0.75% hike next week seems unlikely.

I've been following the interest rate expectations on TMX a lot over the last few years. I find it quite reliable. Now the question is, what are they seeing that we don't?


----------



## m3s

Thal81 said:


> Now the question is, what are they seeing that we don't?


Not we but you 😂

Many see raising rates into a recession as unfeasible. Normally they should raise rates when the economy is running hot. Economy has already cooled off significantly

Bullwhip effect is coming


----------



## crgf1k

Thal81 said:


> Heck, even the 0.75% hike next week seems unlikely.


The BOC is saying today that inflation expectations are high, which apparently can be a self-fulfilling prophecy. Here's a discussion about it on BNN today. This guy thinks they will raise 0.75% next week. 









Inflation expectations hit record: BoC


Inflation expectations over the next couple of years have hit at a record in Canada, a worrying development that will stoke bets of more aggressive interest rate hikes. Bloomberg News' Theo Argitis reports.




www.bnnbloomberg.ca





Maybe the rate expectations you're looking at are anticipating that the BOC will have to reverse course late in the year?


----------



## Thal81

crgf1k said:


> Maybe the rate expectations you're looking at are anticipating that the BOC will have to reverse course late in the year?


They're expecting 0.75% hike by September, which I assume includes both the July and September rate hikes. So it could be something like +0.50% next week and +0.25% in September. Then we'd have +0.25% again in both October and December to bring the rate to 2.5%.

Anyways, it's all (educated) speculation, I was just surprised at the downward trend when everyone seems to think interest rates need to go to the moon to tame inflation....


----------



## nathan79

Thal81 said:


> I've noticed a significant downward trend in interest rates expectation over at the TMX website. A month ago the market was pricing in a solid 3% BoC rate by December, and up to 3.5% in early 2023. Now they think it's going to be about 2.5% by December, and drop somewhere between 2 and 2.25% by mid 2023. Heck, even the 0.75% hike next week seems unlikely.
> 
> I've been following the interest rate expectations on TMX a lot over the last few years. I find it quite reliable. Now the question is, what are they seeing that we don't?


They're looking at the wrong data. Nothing has really changed from the BoC perspective. They are always backwards-looking, so they will likely raise .75% based on May's CPI. They may raise only .50% in September if inflation starts coming down.


----------



## Covariance

Thal81 said:


> I've noticed a significant downward trend in interest rates expectation over at the TMX website. A month ago the market was pricing in a solid 3% BoC rate by December, and up to 3.5% in early 2023. Now they think it's going to be about 2.5% by December, and drop somewhere between 2 and 2.25% by mid 2023. Heck, even the 0.75% hike next week seems unlikely.
> 
> I've been following the interest rate expectations on TMX a lot over the last few years. I find it quite reliable. Now the question is, what are they seeing that we don't?


The BoC will only continue to raise their policy rate if they feel the need to do so. Thus the futures market is factoring in an increased probability of either data showing recession or lower inflation pressure by that time. Either of which would be a reason for the BOC to slow the rate of increases, should the data be present, at future decision dates.


----------



## londoncalling

I am fine with lower raises if it means inflation rates are normalizing. I am also good with higher raises if the economy remains strong. The rate environment we have experienced was unhealthy and created a lot of bubbles and inequalities in the system. Unfortunately, I think the expectation is that recession is looming if not already here. As the B of C often follows the US fed's lead they will do an about face when the US does should their economy stumble in a big way even if Canada is doing ok. I haven't figured out why Canada's rate can't be marginally higher than the US. I think it would spur foreign investment in this country in something other than RE.


----------



## damian13ster

Covariance said:


> The BoC will only continue to raise their policy rate if they feel the need to do so. Thus the futures market is factoring in an increased probability of either data showing recession or lower inflation pressure by that time. Either of which would be a reason for the BOC to slow the rate of increases, should the data be present, at future decision dates.


The BoC needs to be mostly concerned with inflation expectation.
And inflation expectation among businesses and individuals is rising. If that's not fixed quickly (and since we have idiots running government, that means BoC needs to act decisively and swiftly), then we will enter inflationary spiral.


----------



## MrBlackhill

MrBlackhill said:


> What's this smell? Is it the smell of a recession?
> 
> 3 more hikes max.
> 
> View attachment 23312
> 
> 
> 
> 
> 
> 
> 
> Canada Government Bonds - Yields Curve
> 
> 
> Canada Government Bonds and Yields Curve. Updated charts and tables, agencies ratings, spread comparisons, current prices.
> 
> 
> 
> 
> www.worldgovernmentbonds.com


This is not going in the right direction! Yields for mid and long term bonds have decreased while yields for short term bonds have increased.


----------



## damian13ster

Yep, recession is expected.
Would be different story if Bank of Canada acted according to their mandate and started raising rates much earlier in 2021 rather than cover their eyes and pretend inflation doesn't exist, that it is simply supply chain.

Since they failed to do that now they lost credibility and businesses and canadians have lower faith in them, and inflation expectations are largely detached from inflation target - time to bring out sledgehammer and knock it down, otherwise it will spiral out of control


----------



## Ukrainiandude

Thank you, dear money printing presses.


----------



## sags

Recession is a far worse scenario than inflation.


----------



## m3s

sags said:


> Recession is a far worse scenario than inflation.


You fail to understand the implications of having to raise rates into a recession. Just making lame excuses to yourself for incompetence as usual


----------



## james4beach

Interest rates (bond yields) have been crashing in the last few days. With this sharp decline in commodities as well, it's starting to look like the market doesn't fear inflation so much any more.

Perhaps interest rates have peaked now?


----------



## sags

Stock markets are getting hit hard on recession concerns. The inflation story is winding down and future interest rate hikes will be limited or finished.

Oil below $100 and forecasts are for $60 oil by the end of the year. Copper down 40% to 2017 prices. Natural gas declining. Vehicle prices are falling.

The "transitory" inflation caused by "supply chain disruptions" is winding down as the supply chains become untangled.

Europe and the US are already in recession. A deep recession will force the Fed to lower interest rates and restart QE.

Congratulations to those who locked in their GICs at fat interest rates.


----------



## james4beach

sags said:


> Stock markets are getting hit hard on recession concerns. The inflation story is already over and interest rate hikes will be limited or finished.


Hard to say. One day does not establish a trend.

I'd say we still don't know, it could go either way. I think it's a coin flip, whether interest rates go higher or lower for the rest of the year.


----------



## AltaRed

The yield curve inverts and we go into recession. This has been demonstrated for decades.

Unless the US Fed blinks, and we are hooped if they do that, we are headed for the so called neutral rate of 2.75% give or take 25bp or so (but above inflation), and where it should stay long term. Real interest rates have to be positive to stem excessive use of cheap credit.


----------



## m3s

sags said:


> The "transitory" inflation caused by "supply chain disruptions" is winding down as the supply chains become untangled.
> 
> Europe and the US are already in recession. A deep recession will force the Fed to lower interest rates and restart QE.
> 
> Congratulations to those who locked in their GICs at fat interest rates.


GICs are negative in real terms before tax unless the rate of inflation is less. Even "winding down" inflation is still inflation

You realize that restarting QE would send stocks and assets back up. It's a bullwhip effect. Fed is trying to drive the swerving economy by looking in the mirror

You're in the backseat in clown makeup with a bicycle helmet on singing nonsense


----------



## Ukrainiandude

AltaRed said:


> recession


So what? The Sky is falling narrative again and again.








will this be the first recession or the last one? Neither.
Relax and enjoy.


----------



## AltaRed

I don't really care one way or the other. My portfolio will ride through it all as it has done before. My comment is simply that inverted bond yield curves generally portend an upcoming recession.

The sentiment here seems to change here every few weeks...like a sidewinder. I trust it is entertaining?


----------



## james4beach

AltaRed said:


> The sentiment here seems to change here every few weeks...like a sidewinder. I trust it is entertaining?


Well the market itself is trying to figure out what's going (if inflation will persist, how high rates will go) and I think the comments at CMF just reflect the same things everyone in the market is wondering.

Who knows, maybe we'll end the year at record high interest rates and $130 oil.
Or maybe the year ends with a _lower_ 10 year bond yield, declining commodities, and easing inflation.

I think both are equally likely. A diversified portfolio will do a reasonable job in either scenario, at least over a few years. That's the best anyone can do.


----------



## AltaRed

I don't know what the odds might be that both are equally likely. I see it as a roll of the dice and that makes the whole debate entertainment, right? 

Me thinks everyone should go on vacation for the next 3-4 months while the sidewinder makes its way through the desert.


----------



## m3s

AltaRed said:


> I don't know what the odds might be that both are equally likely. I see it as a roll of the dice and that makes the whole debate entertainment, right?
> 
> Me thinks everyone should go on vacation for the next 3-4 months while the sidewinder makes its way through the desert.


I think we're in a bullwhip effect where central banks are trying to manipulate markets based on past data while there is significant events and instability in the present

Like I said they're trying to "soft land" or regain some stability of an instable economy by looking in the rearview. I don't need to bet 100% either way but I can bias one way or the other. For example if the central banks have to hold rates when most of the market was expecting increase there will be a whiplash volatility. This whiplash may keep increases hence the bullwhip effect. Like when you over correct and swerving car

It's not that the sky is falling. It's that the central banks are losing control and I can benefit from that. GICs on the other hand are a guaranteed net loss in real terms


----------



## AltaRed

Central banks are obviously trying to engineer a soft landing but they are going to have to give that up pretty soon me thinks. Inflation expectations by consumers and businesses alike are high, exceptionally high actually, based on the latest BoC survey. That is what happens when confidence is (or is in the process of being) lost in the central banker.


----------



## damian13ster

Precisely. The choice isn't between inducing recession or not.
The choices are either inducing recession now, or hyperinflation and total collapse of economy later.
Canada isn't the first country with out of control debt, rising inflation, and falling productivity - we know how it ends, just don't know when and how bad it will be


----------



## Covariance

AltaRed said:


> Central banks are obviously trying to engineer a soft landing but they are going to have to give that up pretty soon me thinks. Inflation expectations by consumers and businesses alike are high, exceptionally high actually, based on the latest BoC survey. That is what happens when confidence is (or is in the process of being) lost in the central banker.


There is also the possibility that inflation comes down over the coming months, perhaps quicker than envisioned by those straight lining past trends. Personally I am open to all possibilities, including this one. Making the case: Commodity prices over the past 6 weeks have fallen significantly. Most notable is the recent move in oil. However, preceding this move were other commodities and metals (copper, grains, aluminum, etc) that dropped 20% or more in a matter of weeks. Target, Walmart and other US retailers have warned of excess inventory that will not clear until Q4. Micron last week warned of a drop in demand for memory and is forecasting unit declines in PCs, smartphones this year. Some of this is a shift to services from goods. We will see.


----------



## damian13ster

Well, they dropped in anticipation of deep recession. If there are signs that recession won't happen or won't be as deep as expected, the prices will rise up again - quickly


----------



## AltaRed

Covariance said:


> There is also the possibility that inflation comes down over the coming months, perhaps quicker than envisioned by those straight lining past trends. Personally I am open to all possibilities, including this one. Making the case: Commodity prices over the past 6 weeks have fallen significantly. Most notable is the recent move in oil. However, preceding this move were other commodities and metals (copper, grains, aluminum, etc) that dropped 20% or more in a matter of weeks. Target, Walmart and other US retailers have warned of excess inventory that will not clear until Q4. Micron last week warned of a drop in demand for memory and is forecasting unit declines in PCs, smartphones this year. Some of this is a shift to services from goods. We will see.


YOY inflation rates will, of course, begin to drop at some point, especially if energy costs do not get appreciably higher. However, energy costs have not yet percolated through all goods and services yet, so the prices of goods and services do not yet fully reflect underlying higher energy costs. The bigger issue will remain wage demands going forward. Once a new 3 year union contract is signed for 5% increases in each of the 3 forward years, these costs will be passed through to customers. That is the key fear of "high inflation expectations" I mentioned in an earlier post on the latest BoC surveys. So yes, we should expect YOY rates to start to decrease but mostly due to purely mathematical reasons.


----------



## damian13ster

Core inflation that strips energy and food has been rising rapidly as well


----------



## Covariance

HISA (TD) at 1.85% today


----------



## MrBlackhill

I've opened a MomentumPLUS Savings Account recently. Even using only a 90-day premium, I get 0.85% + 0.85% + 0.10% + 1.60% = 3.40%


----------



## james4beach

MrBlackhill said:


> I've opened a MomentumPLUS Savings Account recently


Man they sure make this account complicated. I wonder why they would use such a convoluted recipe for the interest rate.


----------



## nathan79

MrBlackhill said:


> I've opened a MomentumPLUS Savings Account recently. Even using only a 90-day premium, I get 0.85% + 0.85% + 0.10% + 1.60% = 3.40%
> 
> View attachment 23410


Bizarre. 

How can Scotia offer this, but Tangerine's regular rate is still only 0.4%? Some people are getting a maximum of 3% even with promotions. I'm currently getting 2.8%.


----------



## MrBlackhill

james4beach said:


> Man they sure make this account complicated.


Not that much, the only thing you have to manage is the premium period when you want to add one.

Otherwise, the money you put in that account will have the regular interest + ultimate interest if you have that account + bonus interest from promotions.

Then, you may add premium periods and the money you move in premium periods will have the premium interest if you don't touch it during the premium period.



nathan79 said:


> Bizarre.
> 
> How can Scotia offer this, but Tangerine's regular rate is still only 0.4%?


Yes, I also have a Tangerine account and I was wondering the same thing.


----------



## MrMatt

nathan79 said:


> Bizarre.
> 
> How can Scotia offer this, but Tangerine's regular rate is still only 0.4%? Some people are getting a maximum of 3% even with promotions. I'm currently getting 2.8%.


These schemes are just ways to buy customers. The discounts and premiums come from the marketting budget, not in the underlying financials of the activity.

In what way does it make sense for the bank to pay you 2.8%, when they can borrow from the BoC for 2.5%?


----------



## james4beach

I've become somewhat tired of these promo games over the years.

Many can be very tricky. My parents opened a Momentum account some time ago (based on one of these promotions) but they've never gotten the high rates ever again. I believe the high rate is also cancelled if you move money out during the period, similar to what Simplii does.


----------



## james4beach

Interest rates appear to be stable for the time being. You can see this in the charts of XSB and XBB ... their prices have now been stable for about 3 weeks (yields not changing much)


----------



## MrBlackhill

james4beach said:


> I've become somewhat tired of these promo games over the years.


I don't really care about the promos either, it's simply that our main operations are with the Scotiabank. Rates are so low anyways and I don't really hold cash other than for some annual expenses and I just thought that even at only 1.5% to 2% that could bring about $150/year, which is basically nothing, but I'll take it anyways. After all, $150/year invested in the market over 30 years could turn into $20k inflation adjusted.


----------



## Thal81

TDB8150 is now at 2.25%.


----------



## james4beach

Thal81 said:


> TDB8150 is now at 2.25%.


Wow that's actually impressive, this is within 25 basis points of the BoC rate.

And by the way, longer term interest rates have fallen sharply in the last couple days. Both the 5-year and 10-year bond yields (interest rates) are down significantly this week.

There is now some inversion in the Canadian yield curve:
2 years @ 3.11%
5 years @ 2.88%
10 years @ 2.88%


----------



## Thal81

james4beach said:


> And by the way, longer term interest rates have fallen sharply in the last couple days. Both the 5-year and 10-year bond yields (interest rates) are down significantly this week.


Yeah, and this is reflected in the price of bond funds like ZAG and XBB which have shot up a lot this week. But this trend really started in mid-June when bond funds bottomed. The market doesn't believe we're going to see high interest rates in the long term, and I agree with them.


----------



## james4beach

Thal81 said:


> Yeah, and this is reflected in the price of bond funds like ZAG and XBB which have shot up a lot this week. But this trend really started in mid-June when bond funds bottomed. The market doesn't believe we're going to see high interest rates in the long term, and I agree with them.


I'm still not sure. The market seems willing to believe the central banks but I personally doubt their commitment to fighting inflation. I think the central banks (including the BoC) are biased towards protecting real estate and propping up the credit economy.

I think they are acting tough, and "*the act*" is part of the game here... but I think they're bluffing. Personally I don't think the Federal Reserve or Bank of Canada is really committed to raising rates enough to fight inflation. So I think we could easily end up in a situation where, a few years from now, we still have chronically high inflation and the central banks have to tighten further than anyone is guessing right now.

That being said, I continue to keep a 50% bond and GIC allocation because it's impossible to accurately predict these things, and rising interest rates are actually good for my bond portfolio in the long term. But I will NOT be surprised at all if we see much higher interest rates in the coming years.


----------



## james4beach

This will be an exciting week, so buckle up

Tuesday has some critical US housing data including the Case-Shiller national home price index value. This will give some insight into whether real estate is responding yet to central bank tightening.

*Wednesday July 27* is the Federal Reserve's decision on interest rates and press conference with Powell

Thursday is American GDP release and jobless claims (both are quite important economic data)

Friday is a ton of inflation-related data including the PCE and Chicago PMI


----------



## londoncalling

Anybody have any guess on the amount that the Fed will raise? I am going to say .75% I will also follow that guess with disclosing that I haven't guessed right all year for either US or Canada. I am going get August right though. No change in rate. : D


----------



## Covariance

james4beach said:


> This will be an exciting week, so buckle up
> 
> Tuesday has some critical US housing data including the Case-Shiller national home price index value. This will give some insight into whether real estate is responding yet to central bank tightening.
> 
> *Wednesday July 27* is the Federal Reserve's decision on interest rates and press conference with Powell
> 
> Thursday is American GDP release and jobless claims (both are quite important economic data)
> 
> Friday is a ton of inflation-related data including the PCE and Chicago PMI


Great list. One addition, on Friday we see Canada GDP.


----------



## Covariance

londoncalling said:


> Anybody have any guess on the amount that the Fed will raise? I am going to say .75% I will also follow that guess with disclosing that I haven't guessed right all year for either US or Canada. I am going get August right though. No change in rate. : D


75 or 100 There is no meeting in August and the Sept meeting is later in the month on the 21st.


----------



## james4beach

Covariance said:


> Great list. One addition, on Friday we see Canada GDP.


Wow thanks, didn't know Canadian GDP is this week as well!

US economic data is starting to look bearish (e.g. manufacturing indicators, and last week's Initial Jobless Claims).

If GDP prints for US & Canada look weak... holy cow, watch out.


----------



## londoncalling

Covariance said:


> 75 or 100 There is no meeting in August and the Sept meeting is later in the month on the 21st.


I was aware that the next meeting is in September. It is why I know I will get the August rate correct. I would have used an emoji but for some reason or other that function is not working for me on the forum at this time.


----------



## MrBlackhill

I currently get 3.90% annualized interests in my HISA if I let my money sit there for only 90 days.

I never hold cash other than for the big yearly expenses, so I'm using this HISA by chunks of 90 days for those upcoming expenses.


----------



## james4beach

The Fed did a moderate rate hike today.

The market is reacting like we are now back to easy monetary conditions. And maybe we are ... the Fed funds rate is still providing monetary stimulus.


----------



## MrBlackhill

Yield curve is inverted and the clock is ticking.


----------



## Covariance

james4beach said:


> The Fed did a moderate rate hike today.
> 
> The market is reacting like we are now back to easy monetary conditions. And maybe we are ... the Fed funds rate is still providing monetary stimulus.


Participants recognize it could have been a lot more hawkish. 75 and a recognition that demand is slowing is a lot better than 100 with the blinkers on.


----------



## james4beach

Anyone think interest rates may have topped out here?

The 10 year bond yield has been plummeting.


----------



## Gator13

I think they have likely peaked and that they might even start to drop.


----------



## MrBlackhill

james4beach said:


> Anyone think interest rates may have topped out here?
> 
> The 10 year bond yield has been plummeting.


Yes because the yield curve is inverted.

Policy rates will still be increased due to the psychological effect, but otherwise these were the best long-term yields you could have a few months ago.















Canada Government Bonds - Yields Curve


Canada Government Bonds and Yields Curve. Updated charts and tables, agencies ratings, spread comparisons, current prices.




www.worldgovernmentbonds.com


----------



## nathan79

james4beach said:


> Anyone think interest rates may have topped out here?
> 
> The 10 year bond yield has been plummeting.


Depends what interest rate you mean, and maybe.

Central banks will keep hiking, but they may slow the pace of the hikes. I expect at least one more large-ish hike (either .50 or .75). Then will probably hike by minimum .25 at each meeting until inflation is under 3%. That could be at least 6-9 months from now, IMO. A lot depends on what happens with the war, supply chains and whether the hikes are effective at taming inflation, but that's how I see it.


----------



## hfp75

I think BoC will raise rate at the next meeting another .75-1%, then we have up to another 0.75% up before we are truly done... that top rate will not last and then start to drop, but it will not drop fast...... which will draw out the pain from this fast rise.....

I think the pain from this quick rise in rates will last 2-3 Yrs....


----------



## Covariance

james4beach said:


> Anyone think interest rates may have topped out here?
> 
> The 10 year bond yield has been plummeting.


No. As I expect short term rates to go higher. Longer terms are more complex and a longer answer is needed


----------



## MrBlackhill

Covariance said:


> No. As I expect short term rates to go higher. Longer terms are more complex and a longer answer is needed


I agree with you even though I said "yes" because it depends at which term we are looking, but since @james4beach pointed 10-year bond yield as an example, I don't think the 10-year bond yield will go back above 3%, but I agree that the very short term bond yields (less than 1 year) will still increase and maybe reach 3.5%. Not sure it'll touch 4% though. But I honestly don't know what I'm talking about.


----------



## james4beach

Covariance said:


> No. As I expect short term rates to go higher. Longer terms are more complex and a longer answer is needed


Sorry I should have clarified, I meant to ask about longer term interest rates: do you think the 10 year yield may have already peaked?

Some analysts think we're going to see the 10 year treasury bond yield go towards 4% or even 5% due to chronic inflation.


----------



## sags

The stock markets often react positively the day the Fed announcement is made.

After pondering all the possibilities, the next day is usually when the big dump happens.

If stocks go up tomorrow......it would be a good indicator of a possible bottom was reached......at least for now.


----------



## Covariance

james4beach said:


> Sorry I should have clarified, I meant to ask about longer term interest rates: do you think the 10 year yield may have already peaked?
> 
> Some analysts think we're going to see the 10 year treasury bond yield go towards 4% or even 5% due to chronic inflation.


I’m not convinced inflation will drop as quickly as predicted in the futures market for the Fed (FFR). If this is the case I would expect volatility in the 10 and a higher yield as part thereof.
It’s obviously an evolving question and each data point is important. Tomorrow we get PCE.


----------



## james4beach

Covariance said:


> I’m not convinced inflation will drop as quickly as predicted in the futures market for the Fed (FFR). If this is the case I would expect volatility in the 10 and a higher yield as part thereof.
> It’s obviously an evolving question and each data point is important. Tomorrow we get PCE.


And let's remember that QT really steps up in September. That could be a game-changer in the bond market.

Unless the Federal Reserve chickens out of QT, which I also think is possible.


----------



## MrBlackhill

I've just read real estate stats for July 2022 on Montreal Island.

Prices are up somewhere around +7% from July 2021. Prices are down somewhere around -4% from peak month (which was April 2022). Though sales are down by -15% to -40%.

Median prices for plex are still up +35% in my area inside Montreal from when I bought in May 2019, which is about +10% CAGR. Prices can drop -25% before I start losing money. I don't think they will. Montreal's bubble is much smaller than Toronto & Vancouver.


----------



## sags

Home prices in the GTA are down massively, but look at where the prices still are.

They are still way too high for average people, especially with higher interest rates.

A 5 year fixed rate mortgage is already 5.3% and heading towards 7%.

People who have to renew their mortgages are looking at huge monthly payment increases.

People with variable rate mortgages will only pay the interest on the debt.

How are the banks and lenders going to handle people who are "underwater" on their homes ?


----------



## Gator13

^ Thanks for sharing. Which website is that from?


----------



## sags

Toronto Regional Real Estate Board.

Lots of graphs and charts there.



https://trreb.ca/files/market-stats/housing-charts/TREB_Housing_Market_Charts-July_2022.pdf


----------



## nathan79

Some areas I've been following...










Some places are down even more. In Mission, BC (just across the river from Abbotsford) the median price is down 27.8% over the same period. I define a drop of 30% as a crash, so we're getting near crash territory. I think this will be a full-on crash in many areas by fall. I see that it's already a crash in parts of the GTA by that measure.


----------



## damian13ster

When it comes to that I like to look at how many years of price gains were lost before calling something a 'crash'.
Right now it is still nothing. Maybe a year of price gains lost, a little bit less than that actually


----------



## nathan79

damian13ster said:


> When it comes to that I like to look at how many years of price gains were lost before calling something a 'crash'.
> Right now it is still nothing. Maybe a year of price gains lost, a little bit less than that actually


True... but tell that to the people who bought at the top. 

This is only the beginning though. I expect we'll go below pre-COVID prices before the market finds a bottom. And then we're likely to bump and grind along at those depressed values for quite some time. I wouldn't be surprised it it took 10 years to recover the losses.


----------



## sags

It will be interesting to see if cottages get whacked. I was looking at a full mobile home in a park on Lake Huron beach for $40k and they shot up to $150k in a couple years.


----------



## AltaRed

nathan79 said:


> True... but tell that to the people who bought at the top.
> 
> This is only the beginning though. I expect we'll go below pre-COVID prices before the market finds a bottom. And then we're likely to bump and grind along at those depressed values for quite some time. I wouldn't be surprised it it took 10 years to recover the losses.


I am not at all certain we will see a repeat of the late '80s to circa 2000 in Toronto and Vancouver where it took 10+ years to recover. I think there is more foreign money now that is more inelastic to the global economy. We may need to look at some other world cities of note to see how they reacted at different periods.


----------



## james4beach

I now think the Fed and BoC will be forced to raise for the foreseeable future, at least another year or two of rate hikes.

Mortgage rates heading towards 6%, I think


----------



## sags

People who sold at the top of the home markets made out like bandits. The buyers of their homes are screwed.

The real estate industry wants a return for 40 year mortgages, relax the qualifying amounts, and no down payments.

None of them solve the core problem that the homes prices are 70% too high.

A $1,000,000 home is worth $300,000 when interest rates are 7% or higher, and median wages are in the mid $40,000 range.


----------



## bigmoneytalks

sags said:


> People who sold at the top of the home markets made out like bandits. The buyers of their homes are screwed.
> 
> The real estate industry wants a return for 40 year mortgages, relax the qualifying amounts, and no down payments.
> 
> None of them solve the core problem that the homes prices are 70% too high.
> 
> A $1,000,000 home is worth $300,000 when interest rates are 7% or higher, and median wages are in the mid $40,000 range.


What's more concerning is we let real estate be a a big portion of our economy. The right thing to do is let this market correct but will be painful short term for everyone. Do our governments have the [email protected]$$ to do the right thing? We must find other industries to spur economic growth. Real estate is not sustainable!


----------



## AltaRed

This link is dated to 2017 (situation is actually much worse) provides some context of the idiocy that has reigned since the financial crisis. Easy credit and relaxed mortgage terms blew the doors off that barn. The piper really has to be paid and it could be very painful to the economy and our GDP. I somehow doubt the government and BoC has the balls to send housing prices back to the trend line.


----------



## dubmac

bigmoneytalks said:


> Do our governments have the [email protected]$$ to do the right thing?


problem is [email protected]$$ in doing the right thing and letting the market find a sustainable normal flies in the face of getting votes!
If a politician promises to "do the right thing" raise interest rates and induce a recession, then they won't get elected. It's very simple really. that's why it probably won't happen.


----------



## scorpion_ca

dubmac said:


> problem is [email protected]$$ in doing the right thing and letting the market find a sustainable normal flies in the face of getting votes!
> If a politician promises to "do the right thing" raise interest rates and induce a recession, then they won't get elected. It's very simple really. that's why it probably won't happen.


The federal election will be in 2025. I think BoC will increase the rates until the middle of 2024 or inflation is around 2% whichever comes first.


----------



## james4beach

AltaRed said:


> I somehow doubt the government and BoC has the balls to send housing prices back to the trend line.


I also doubt they have the balls, but we're going to end up in an awful situation if inflation stays high over many years.

They may hesitate to tighten rates and mortgages at first, but if we find ourselves three years from now with inflation still running at 6% we're in a world of trouble.


----------



## Covariance

Separating all the noise and looking at the big picture, so far this year the curve has followed a classic evolution for this stage of the cycle. The level across the curve rises and steepens. The front comes up with CB policy rate increases, and as the long end slows, the slope decreases. The front continues to rise and we lose the curvature.


----------



## james4beach

Interesting details in a recent Bloomberg piece about HCG and EQB. And don't forget that Home Capital almost collapsed in 2017, and probably would have, if Buffett didn't swoop in for a distressed credit play (something he does occasionally).

*About 64% of Home Capital’s borrowers will need to renew their mortgage within 12 months*, and some could face payment increases of as much as C$850 ($655) a month, stressing their ability to pay, Gloyn estimated in a note in July. EQB would likely have “roughly similar outcomes” in its Alt-A segment though the company doesn’t provide the disclosures needed to conduct that analysis, he said.​​


----------



## AltaRed

The HCG near death experience in 2017 was a run on the bank (HISA deposits) after disclosure and reporting of some underwriting irregularities. Not because of credit losses. They didn't have enough liquidity to fund the hemorrhage and learned their lesson that relying too much on HISA deposits is a life threatening risk. Note that Oaken Financial no longer has the highest (or near the highest) HISA rates compared to pre-crisis.

These (and all banks) have sophisticated risk management algorithms to make a call on which of their portfolio is at credit risk. They then all take provisions (set aside capital) to deal with that. Of course, there is always a risk they will have underestimated the problem and have to scrambling for more capital.


----------



## Covariance

The home will be the last to go. Toys, cars, second homes etc are first. Regulatory action and stress tests over the past couple of years have identified any issues in real banks related to mortgage lending. They or their Boards would have addressed by now. Shadow banks, fin tech (buy now pay later), is an entirely different matter. This I expect to show some surprises if things get really tough.


----------



## AltaRed

That has historically been the case, i.e. mortgage payments are the last to go, and I would expect that would be the case again. There are not many publicly traded alternative lenders anyway. The biggest ones are LB, EQB and HCG and Equitable in particular is branching out by purchasing Concentra which has the bulk of its business providing services to credit unions. The likes of Intact, Element et al are not banking businesses.

Both HCG and EQB stock have been hit fairly hard the past 6+ months. LB is the exception but it has been a perennial basket case for some time and doesn't seem like it will rise any time soon.


----------



## james4beach

AltaRed said:


> That has historically been the case, i.e. mortgage payments are the last to go, and I would expect that would be the case again.


Yeah I agree. But then again, the "safety" of mortgages is also something that's already known, and priced into bond markets and the stocks of these lenders.

As marginal lenders, I've always worried about HCG and EQB though.


----------



## Covariance

A parse of Canada's GDP release this morning shows higher rates are impacting demand (housing, non-durable goods). GDP was negative in July at the first estimate. We will see if it is revised upward or stays negative. None the less it's slowing and heading for a recession (Canada) this winter.


----------



## damian13ster

2 year bond auction results in Canada were very telling too: 3.579%


----------



## james4beach

damian13ster said:


> 2 year bond auction results in Canada were very telling too: 3.579%


That's virtually the same as the American 2 year treasury bond.

I don't think anything too surprising is happening here. The Canada & US yields are moving almost in lock step as both central banks are aligned on policy. The yields are fluctuating as the market continues updating expectations based on inflation, etc.


----------



## damian13ster

Latest: 3.307% for US 2-yr auction
3.579% for Canadian 2-yr auction.

Canada pays 8.2% more for its debt than US does.
But the sentiment of your message is right - both countries are running absolutely insane fiscal policy.


----------



## james4beach

The Bank of Canada makes their next rate decision next Wednesday, September 7.

Futures markets are currently pricing in a 75 basis point hike. However, the central banks have surprised people before... so who knows. If they do a 75 basis point hike the policy rate would become 3.25% next week.

Bank prime rates would then become around 5.5%. I still expect that prime rates (and mortgage rates obviously) will exceed 6% within a few months.


----------



## scorpion_ca

My guess is that BOC will increase 75, 50 and 25 for rest of the year.


----------



## Covariance

james4beach said:


> The Bank of Canada makes their next rate decision next Wednesday, September 7.
> 
> Futures markets are currently pricing in a 75 basis point hike. However, the central banks have surprised people before... so who knows. If they do a 75 basis point hike the policy rate would become 3.25% next week.
> 
> Bank prime rates would then become around 5.5%. I still expect that prime rates (and mortgage rates obviously) will exceed 6% within a few months.


strangely my model predicts BoC will do what the Fed vehemently claims they will not do. Drop quickly after the run up. And it‘s conditional probability is highly dependent on the Fed living up to its claims. Plainly said, if the Fed follows though with higher, longer and BoC goes higher this fall, then the probability of a winter recession in Canada is high (flagging exports) which means Canada rates drop back rather quickly.

We will see.


----------



## hfp75

I would agree that the Central Banks tighten hard, to stop inflation.... I would also agree that this will create a recession. This is where the water gets muddy for me. Some parts of the economy & CPI will respond 'predictably' at this point, and others 'might not', time will tell. Even if with rising rates we can drop 85% of the inflationary pressures we still get an overall 'win' with a possibility of a stubborn inflation rate of 3+%. Still a win from 9%. If that is the case, will they drop prime rates if we are/have triggered a recession ? Powell has stated that 'there will be personal and corporate pain' and he has also stated that rates will remain higher for longer than expected. History has shown us that dropping rates to quickly after inflation has responded/corrected, allows a reversion and inflation reoccures. So, to keep the dog healing we need to keep the collar tight and close. Thus we need to evaluate weather we want a recession (depending on how bad it is), or to risk inflation returning (market evaluation required). 

Muddy waters..... 

I have no doubt that we can crush 85%'ish of the current inflationary pressures by raising rates. This will most likely cause a recession and possibly some corrections in finance circles. This fiscal accountability is VERY healthy IMHO.... and needs badly to happen. Since '08 we have constantly bailed everyone & everything out of every hole. The real question is; once inflation has dropped off, how bad is the recession and how likely is it to return if we drop rates to combat the recession. This later stage, is the real balancing act & where the pain will occur. I have a feeling 'THE PAIN' Jay Powell talks of is the keeping rates up for longer than people want which means hes more worried about inflation returning. Which makes 100% sence to me. He started raising rates to late and will take the blame on that, he doesnt want to drop the ball on inflation twice. Also, lets not forget the FALL OF 2018 ! Powell was worried (early in his roll as the Governor) that the monthly QE and existing balance sheet would cause inflation, he gave forward guidance that he would 'let the balance sheet just roll off the books' and did not include 'data dependency' language as the driving force, at the same time he was raising rates. Markets reacted and in a short time he had to do the Powell PUT, Pivot. He quickly adopted data dependency language, paused the rate changes, and pushed forward guidance language at the meetings.... Point here, he was fearfull of the theoretical over inflation of the money supply and the onset of inflation. He acted to hard, to fast and markets reacted.... he was schooled. Now, even more cash is in play and we have inflation....

Call it Powell's inflation nightmares...

Yellen is not unwinding QE or changing the PR - talking lots about it but not really doing anything.
Fall 2018 - Fear of possible inflation, raise rates/unwind QE, too much to fast, markets react poorly !!!
Summer/Fall 2021 - Do nothing, wait - got burnt last time, inflation is surfacing...
Spring 2022 - Inflation @ 9%, Panic!!! Raise rates, gotta react here.... Damn it.
2023 - Inflation under control, WOW. OOPS recession.

This is Powell....

... and some of the concerns of all central Bankers....


----------



## james4beach

Check out XSH, the iShares short term corporate bond ETF.

This has only a 3 year duration and the yield to maturity is 4.83%

That's kind of astounding. Wonder if this will go over 5% yield? Of course, if the BoC keeps hiking like this, the yield could go much higher. Plus there's corporate bond risk there. In one of his podcasts, Ben Felix pointed to some research that corporate bonds actually have a history of keeping up with inflation, due to having not only term premium but also credit risk premium.

Also note, there are corporate bonds inside the standard bond funds like ZAG, VAB, XBB as well, so all these funds benefit from the same thing. I really like the structure of those bond funds: largely govt for safety, with a slice of high grade corporate bonds for some extra return (credit risk premium).

@MrBlackhill mentioned elsewhere that economists are forecasting that the central bank rate tops out at around 3.5%. If that's true then XSH would be an amazing buy right now. In any case, I continue to add to my own bond & GIC holdings without trying to forecast future interest rates.


----------



## Beaver101

^ 4.83% yield do look good but then "current" (highest) GIC rates from third party providers are as follow which isn't too far behind (sans the other non-guaranteed "risks"):
1 year = 4.25%
3 years = 4.51%

I wonder when GIC rates are going to climb and by how much. It's painful to see .01% increase increments.


----------



## AltaRed

GIC rates, especially the 3-5 year range, align more with cost of borrowing, which are corporate A or AA 3-5 year bond yields, which are then influenced somewhat with government bond yields. There is also competitive pressure between FIs themselves. You really shouldn't expect longer term GIC rates to move all that differently from bond yields.

As an aside, we should expect brokerage ISA rates to move up ~75bp in the next few weeks. Bank ISAs more or less track the BoC overnight rate, give or take 25bp.


----------



## scorpion_ca

Motive dropped their 5 Years GIC rate from 5% to 4.85%. I was hoping that they would increase it. I don't think we would see 5 years GIC interest rate in between 5.75% to 6% in the near future.


----------



## AltaRed

FWIW, I just looked at iTrade's bond list for corporate A/AA bonds maturing in 2027. The Ask yield is generally in the range of 4.2-4.9% for bank/insurance type bonds. Why would they pay more in GIC yields if they can otherwise issue 5 year bonds for less than 5%?


----------



## Covariance

AltaRed said:


> FWIW, I just looked at iTrade's bond list for corporate A/AA bonds maturing in 2027. The Ask yield is generally in the range of 4.2-4.9% for bank/insurance type bonds. Why would they pay more in GIC yields if they can otherwise issue 5 year bonds for less than 5%?


The duration is not the same, as it impacts their equity duration. Or said differently the impact of changes in rates on the value of the GIC liability and the bond liability are different. And therefore they would have differing impacts on how their equity value would be expected to change with changes in rates.


----------



## AltaRed

Didn't understand that... Financial institutions have a range of funding sources (liabilities) to fund their lending book (assets). They can issue their own bonds, GICs, ISAs, etc. Granted they would not actually issue a new 5 year bond but that is not the point. It is the fair market valuation of an outstanding issue at any given point that matters.


----------



## james4beach

Guests on Bloomberg media have commented that liquidity has been drying up in lower grade corporate bonds, something to keep an eye on. If that liquidity continues to deteriorate it could show an unwillingness of the market to buy corporate bonds. At least the lower grade ones.

Also keep in mind that the central banks have been juicing the corporate bond market with their recent QE and outright corporate bond purchases, so bond market dynamics could change significantly as QT is in play now. The corporate bond market has been heavily distorted through 2020-2021.

I bring this up because as @AltaRed says, the banks have various funding sources, so there's competition. If the appetite for debt in the corporate bond market wanes, which is possible for sure, then the banks might have to offer higher GIC yields. Time will tell.


----------



## AltaRed

It is, of course, all speculative. Don't forget GIC rates would only go up if FIs need to compete to obtain funds and/or consumers are willing to pay more for mortgages and consumer loans. The next 2-3 weeks will be interesting to see what happens with the 1 year GIC and the bond yield curve.


----------



## Covariance

Anyone remember pre Bank of Canada meeting HISA rates? TDB8150 is 2.85% this morning.


----------



## james4beach

Covariance said:


> Anyone remember pre Bank of Canada meeting HISA rates? TDB8150 is 2.85% this morning.


It was 2.25% before the rate hike.
You can also look at the monthly statement to see the rate at month end (this was also 2.25%)

TD increased the rate by 60 basis points.


----------



## james4beach

I was curious about corporate bond yields, so I looked at higher rated corporates. I still feel they're a bit too low and I suspect these yields will go higher.

e.g. (showing yield to maturity)

Suncor bond maturing 2037, rated A
YTM 5.5%

Sobey's bond maturing 2036, rated BBB
YTM 5.7%

Loblaws bond maturing 2035, rated BBB
YTM 5.4%


----------



## Covariance

james4beach said:


> I was curious about corporate bond yields, so I looked at higher rated corporates. I still feel they're a bit too low and I suspect these yields will go higher.
> 
> e.g. (showing yield to maturity)
> 
> Suncor bond maturing 2037, rated A
> YTM 5.5%
> 
> Sobey's bond maturing 2036, rated BBB
> YTM 5.7%
> 
> Loblaws bond maturing 2035, rated BBB
> YTM 5.4%


Generally credit spreads increase and are widest in recession. IG credit spreads increase less than HY credit spreads. The credit spread curve inverts as well for lower quality bonds so you need to be careful with the maturities, although these are all rather long (for corporates).

Risk free rates are still moving up as well due to CB tightening. Faster at the front end but still moving up out to 30.

What's your expected holding period?


----------



## Covariance

Canada jobs report is out. Still a good job market, BUT it's getting weaker - less people working and higher unemployment. The noteworthy construction sector declines further.

Read through to rates; base case 25 penciled in for October may be the last increase this year. We await further upcoming data points (CPI).

Additionally, for those looking to compare Canada and US (and a corresponding read through to rates): Both Canada and the US produced recent reports showing an increase in the unemployment rate. Noteworthy difference is that in the US the unemployment rate increased because more people entered the workforce. The actual number of people employed increased. Whereas in Canada the number of people actually employed decreased.


----------



## sags

Our son is very busy in the commercial/government projects side of construction.

There is also a lot of activity in building skyscraper condos and box malls on the retail side of construction.

I am thinking employment may decline in construction because the skilled trades workers are retiring and there is nobody trained to replace them.

Peter Schiff noted that in the US there are 2 jobs for every 1 person unemployed, but unemployment numbers went up.

He believes the job - unemployment numbers reflect there are a lot of jobs that people aren't trained to do......or want to do.

He calls them "ghost jobs".


----------



## Covariance

sags said:


> Our son is very busy in the commercial/government projects side of construction.
> 
> There is also a lot of activity in building skyscraper condos and box malls on the retail side of construction.
> 
> I am thinking employment may decline in construction because the skilled trades workers are retiring and there is nobody trained to replace them.


If that's the case then hours worked and pay/hour should be increasing (now). All things considered the only way to produce more with less people is if they A. work longer hours, B. increase productivity (either from working harder or automation), or C. a combination of both.


----------



## AltaRed

Or D. a transition to more higher value jobs relative to the total job market. As always, it is output per worker that is a key measure of GDP growth.


----------



## Covariance

AltaRed said:


> Or D. a transition to more higher value jobs relative to the total job market. As always, it is output per worker that is a key measure of GDP growth.


I took OP to mean that the total people working in construction (employed) was declining while output in construction is growing.


----------



## sags

Covariance said:


> If that's the case then hours worked and pay/hour should be increasing (now). All things considered the only way to produce more with less people is if they A. work longer hours, B. increase productivity (either from working harder or automation), or C. a combination of both.


Our son is working 60 hours a week and they did get a raise.

His company raids skilled trades from small companies when they can, so it forces up the labor costs for those small companies to retain employees.

Our son's "net" pay for last week was just under $1600, so construction work can pay well if young people want to pursue that path.

Not many do apparently.


----------



## Covariance

sags said:


> Our son is working 60 hours a week and they did get a raise.
> 
> His company raids skilled trades from small companies when they can, so it forces up the labor costs for those small companies to retain employees.
> 
> Our son's "net" pay for last week was just under $1600, so construction work can pay well if young people want to pursue that path.
> 
> Not many do apparently.


Sounds good. Nothing was meant to be personal. My point was/is that if the industry produces the same and employees drop - then they should be making more. Good to hear he is. Tell him to try and save some. That will bring down inflation as well


----------



## james4beach

Covariance said:


> What's your expected holding period?


These bonds would go into my fixed income ladder that stretches out roughly 20 years, though most of my bonds are out to 10 years.

I might consider something like the 15 year Suncor bond. Unfortunately due to corp bond trading spreads, it's probably best to hold it to maturity. I am hesitant to hold corporate risk for so long, but at sufficient spread (to compensate me for the risk) I might do it.


----------



## james4beach

I have an unsecured line of credit at a pretty competitive rate. For a long time, it seemed like "free money" at around 4% interest.

Now, the interest rate is 7.5%. That really changes things. It doesn't feel like "free money" any more.


----------



## Covariance

Quite the year for (US) risk free bond yields and bear market for bonds. The following chart shows the evolution of the yield curve this year. From the start of the year (bottom line in blue), beginning of Q2 (green), beginning of Q3 (grey) and then the last two weeks. The horizontal axis is the bill/bond term - from 1 month on the left to 30 year on the rate.


----------



## AltaRed

It is about what could have been expected. There is more to come, especially on the front end. The inverted yield curve won't exactly become a ski jump but it could simulate Class 4 or 5 rapids.


----------



## james4beach

AltaRed said:


> It is about what could have been expected. There is more to come, especially on the front end. The inverted yield curve won't exactly become a ski jump but it could simulate Class 4 or 5 rapids.


Yup we could get severe yield curve inversion in the coming months.

Then again, QT has a slow impact because the central banks won't buy new issues of treasury bonds. The impact doesn't really happen until more bonds are issued. Perhaps as QT progresses in the coming months, we'll see long end yields rise too? They are still suppressed by QE and that hasn't shaken out yet.

QT has just started


----------



## AltaRed

US Fed is shrinking its balance sheet by up to $95B a month, as of September, or about $1.1T over the next 12 months. There is considerable debate and difference of opinion on what that means in equivalent rate increases but it is in the right direction. I have no idea what that means for long end rates.

The main policy tool though remains physical rate increases. There is a relatively common view the overnight rate could be in the 4.5-5% range by sometime in 2023, major recession notwithstanding.


----------



## james4beach

AltaRed said:


> US Fed is shrinking its balance sheet by up to $95B a month, as of September, or about $1.1T over the next 12 months. There is considerable debate and difference of opinion on what that means in equivalent rate increases but it is in the right direction. I have no idea what that means for long end rates.


Well shrinking the balance sheet just means they are letting bonds mature and disappear. The balance sheet will shrink naturally, unless they make new bond purchases. It's true that we have no idea what QT will do.

Some economists have noted that QT is not the opposite of QE. There is a difference in mechanisms. QE involved aggressively buying bonds to allow new debt issuance. It was manipulation of free markets to allow, for example, high mortgage origination beyond what the market itself wanted to buy. If this happened in a free market, yields would have gone up. With the government intervention, yields were suppressed and there was artificial demand for mortgages.

But QT doesn't mean selling/dumping all those bonds. It's a different mechanism. Who knows what it will do, if anything.


----------



## AltaRed

james4beach said:


> Well shrinking the balance sheet just means they are letting bonds mature and disappear. The balance sheet will shrink naturally, unless they make new bond purchases. It's true that we have no idea what QT will do.


That is the point, assuming they don't actually have to sell to get $95B off the balance sheet each month. I don't think we should care though.


----------



## Covariance

AltaRed said:


> That is the point, assuming they don't actually have to sell to get $95B off the balance sheet each month. I don't think we should care though.


It works as follows to get the cap each month; first they don’t replace expiring treasuries bonds. If that doesn’t get them to the cap (ie not enough are expirin) they sell Tbills from their holdings. 

in addition, at the long end of the curve their absence of buying leaves market forces to have a greater impact.


----------



## AltaRed

Which is how BofC is doing it as well.


----------



## Covariance

The real test for QT may well occur as the economy slows and increased Government spending collides. A slowing economy lowers Government revenue and leads to increased bond issuance.


----------



## james4beach

An increasing number of pundits in the media (CNBC, Bloomberg) are complaining that interest rates are too high, and are going to cause a disaster.

So the push-back has started. I wonder how much the Federal Reserve is influenced by the industry and real estate lobby.

I'm still afraid that the Fed & BoC are not going to follow through to that 4.5% to 5% range. And then oh boy, we could really get inflation expectations taking root, if the public sees that the central banks are not capable of ever tightening policy.


----------



## AltaRed

I don't think central bankers will blink. The experiences in the '70s and '80 demonstrated why not. The bigger issue is politicians mucking things up providing broad based stimulus which counteracts what central bankers do. What some provinces are already doing on a broad basis such as writing cheques and dropping the gasoline tax is just plain stupid. As much as I detest Ottawa and the Liberals in particular, some of the targeted stimulus such as doubling the GST/HST tax credit helps low income the most. As does some limited dentistry for under 12 kids. Stupid stuff includes more OAS for 75 and older when it should be targeted to boosts in the GIS program instead.


----------



## Covariance

Fed seems determined to rein in inflation and I expect a repeat of the Jackson Hole message tomorrow. IE fighting inflation is the priority and they will stay at it until it's done.


----------



## doctrine

We await news of 'The Pivot'. I actually think it is hard not to see it coming before the end of the year, even if the Fed(s) will stay on message and will not blink today. It's pretty obvious that by December, year over year inflation will be in the 4-5% year range, absent a change in inflation factors. With 1% to 1.5% more in interest rate increases, it puts the inflation rate and the fed rate within 1% of each other. 

The best time to invest for 'The Pivot' will be when everyone is fully convinced the Fed will not pivot.


----------



## Thal81

doctrine said:


> The best time to invest for 'The Pivot' will be when everyone is fully convinced the Fed will not pivot.


Sooo, right now?


----------



## doctrine

Thal81 said:


> Sooo, right now?


The prediction of a pivot is relatively easy, the timing is not. I'm afraid I am as likely as anyone to get it wrong. However, I would say I don't see extreme stress yet in markets and that markets aren't fully buying the Fed's commitment. We haven't been making new lows since June.


----------



## james4beach

doctrine said:


> It's pretty obvious that by December, year over year inflation will be in the 4-5% year range


I don't think this is so obvious. Core inflation actually is marching higher, so even if energy drops, core inflation is accelerating.

We've currently got year over year at something like 8% in the US


----------



## doctrine

james4beach said:


> I don't think this is so obvious. Core inflation actually is marching higher, so even if energy drops, core inflation is accelerating.
> 
> We've currently got year over year at something like 8% in the US


Yes, but all of the forward metrics are down. Way down. The Fed is data dependent and thus by definition somewhat lagging. With leverage where it is, 5%+ interest rates are absolutely crushing, although not everyone is leveraged. But at the margin, tightening is absolutely soul crushing. So it's working and the game of chicken is in full effect, in my view. Something else could change, but I believe there will be a slowdown in hikes, and a 'pause\pivot', because we will be full-on in recession and inflation will slow. 

Now Stage 2 of stagflation is as inevitable as Stage 1, because nothing is being done to relieve underlying causes. It will take 5 years to undo the damage being done by policy, and it has not started, although there are signs conservations are beginning. But the second the monetary-demand suppression pedal is lifted, inflation will re-surge like nothing happened, because no one is addressing supply in any meaningful way, only suppressing demand temporarily. Fun times.


----------



## james4beach

doctrine said:


> With leverage where it is, 5%+ interest rates are absolutely crushing, although not everyone is leveraged. But at the margin, tightening is absolutely soul crushing.


And it should be. Many people did lots of stupid things, leveraging aggressively into real estate for example. Hell, in Canada, some of that leveraged real estate stuff is considered normal. That's how bad it's gotten... people just think tiny downpayments and multiple mortgages are normal.

The central banks need to stomp out that behaviour. If they don't, as you said in your post, the moment they start flooding liquidity into the markets again, the aggressive leveraged gamblers will go berserk and push asset prices to the MOON.

I agree with you that it's a game of chicken. But I think the central banks really need to inflict pain and suffering, especially need to stomp these leveraged idiots. Because right now I still think there's too much hope and optimism remaining. People are ready to buy, borrow, deploy funds the moment there's a sign of the Fed turning dovish.

That shows me the central banks haven't gone far enough yet. They have to continue until they at least snuff out the optimism... it's a psychological battle.

This is why I've posted in other thread, that I expect the central banks to make me cry. I really hope they do. If they just give up easily, we're so screwed. They need to keep tightening conditions until it's extremely painful, until we're all crying and feeling hopeless.


----------



## m3s

james4beach said:


> And it should be. Many people did lots of stupid things, leveraging aggressively into real estate for example. Hell, in Canada, some of that leveraged real estate stuff is considered normal. That's how bad it's gotten... people just think tiny downpayments and multiple mortgages are normal.


My landlord owns a bunch of brand new buildings. They were like $800k pre-built.

His dad is a boomer RE agent and probably convinced him to do this. He already open that he's not in a good position now. That's a lot of leverage for something that probably cost $100k for a company to build. I could see a massive RE correction. Not sure why you'd want to rent out new builds especially when rent is less than a mortgage

They are building streets of these for "investors" Door frames all crooked, no vapor barrier, gaps in roof = $800k


----------



## james4beach

m3s said:


> His dad is a boomer RE agent and probably convinced him to do this.


Oh for sure his RE agent dad talked him into this. These people have lived an entire lifetime of this and really think it's how it works: borrow money, buy another property, get very rich.

Do you know that the cap rates on many of these properties are only like 3% to 4% ? Many of these RE investors are now making worse returns than they could get in GICs!


----------



## m3s

james4beach said:


> Do you know that the cap rates on many of these properties are only like 3% to 4% ? Many of these RE investors are now making worse returns than they could get in GICs!


He told me he "isn't making money on this" and that rents came down because landlords started to panic and lowered listings

I just did the math on buying vs renting in the market and it made no sense to buy. My rental manager/agent in the US also said people who bought during pandemic aren't getting the rent they wanted because "it doesn't work that way"

I doubt he's cash flow positive and now he has to deal with really bad contractors - over 100 warranty issues. Very happy to rent


----------



## Ukrainiandude

In celebration of the 2022 Mid-Autumn Festival, Wealth One Bank of Canada offers a limited-time GIC special promotional rate* on 1 to 5 year terms.

Terms 1 year 2 year 3 year 4 year 5 year
Rates 4.68% 4.88% 5.08% 5.08% 5.18%

Purchase a 1-5 year term GIC any time from September 19 to October 30, 2022.


----------



## james4beach

Ukrainiandude said:


> In celebration of the 2022 Mid-Autumn Festival


Wow, more than half the text on their site is in Chinese. Yeah sorry but I don't do business with banks who can't even show their basic Help or Contact info in English.

"WealthONE is co-founded by a group of Chinese-Canadian business leaders with insurance, real estate and retail expertise."


----------



## sags

A young guy told me a couple months ago he got a notice to evict because they were renovating to sell units as condo units.

Talked to him today and he said he got another letter telling him to ignore the first letter.

Apparently they evicted a couple tenants, painted and put in new flooring and put them up for sale, but there are no buyers.

Real estate …… meet wall.


----------



## sags

A guy on CNBC did the math on US housing on air.

He took the average home price from 3 years ago and the 30 year fixed rate at that time and the payment was 3200 a month.

The payment on the same home today at a lower price but the current 30 year rate is $5400 a month.

Higher interest rates wont make homes more affordable unless home prices crash and burn .

No wonder nobody is buying.


----------



## KaeJS

sags said:


> No wonder nobody is buying.


Nobody is selling, either.


----------



## Eclectic21

Maybe in your area. 

Around here there are still for sale signs out ... granted with fewer sold signs going up than six months ago.


Cheers


----------



## Retired Peasant

james4beach said:


> Wow, more than half the text on their site is in Chinese. Yeah sorry but I don't do business with banks who can't even show their basic Help or Contact info in English.
> 
> "WealthONE is co-founded by a group of Chinese-Canadian business leaders with insurance, real estate and retail expertise."


Nonetheless, covered by CDIC


----------



## Synergy

Less active listings and total sales in my neck of the woods (small town Ontario) but average price is still up 13% compared to Aug 2021.


----------



## MrMatt

james4beach said:


> Wow, more than half the text on their site is in Chinese. Yeah sorry but I don't do business with banks who can't even show their basic Help or Contact info in English.
> 
> "WealthONE is co-founded by a group of Chinese-Canadian business leaders with insurance, real estate and retail expertise."


Did you go to the Chinese or English page?
The only chinese on the english page is the language selector at the top right, and the contact us in the bottom left.


----------



## sags

Fed rate rises .75 points. The Fed says interest rates will be higher for longer.......likely until 2025.

US 30 year fixed rate mortgages will be over 7%, which is higher than many have ever experienced.


----------



## Bean

sags said:


> Fed rate rises .75 points. The Fed says interest rates will be higher for longer.......likely until 2025.
> 
> US 30 year fixed rate mortgages will be over 7%, which is higher than many have ever experienced.


Canada 5 year bond yield down 0.07 and 0.11 since Powell started talking. Market doesn't think Canada can keep up with the fed. CAD also taking a hit.


----------



## james4beach

Personalities in US media are complaining loudly about the Fed's rate hike.

The Fed rate is still *only 3.1%* after this rate hike, still one of the lowest rates in all of history! Just amazing how everyone became addicted to the drug (of zero rates).


----------



## Synergy

james4beach said:


> Personalities in US media are complaining loudly about the Fed's rate hike.
> 
> The Fed rate is still *only 3.1%* after this rate hike, still one of the lowest rates in all of history! Just amazing how everyone became addicted to the drug (of zero rates).


People love to ***** and complain -- human nature i guess. It will be a hard lessened learned for some. Unfortunately many will never be responsible. The government should be leading by example, in which they don't.


----------



## Covariance

james4beach said:


> Personalities in US media are complaining loudly about the Fed's rate hike.
> 
> The Fed rate is still *only 3.1%* after this rate hike, still one of the lowest rates in all of history! Just amazing how everyone became addicted to the drug (of zero rates).


We have yet to see the real impact in the real economy. Financial markets are adjusting. But lending (loans, mortgages, bank debt) where banks and non-banks provide credit - different story. As this twists tighter the impact on the real economy will expose some issues.

Soft landing or debris trail? Probably somewhere in between. We will see. The fuse burns shorter.


----------



## Covariance

On a more positive note, some of these yields available are starting to look quite good.


----------



## Covariance

Looking back on the week yields moved higher across the curve (the red line is Friday's close, yellow the prior week). On sentiment, yields hit year to date highs and Fed futures drove higher, for longer and the peak pushed later in the spring.


----------



## Ukrainiandude

Any idea when they might start?
Sept 26 (Reuters) - Inflation is too high and the Bank of Canada needs to lift interest rates to slow spending and give the economy time to catch up, Governor Tiff Macklem said on Monday.


----------



## m3s

UK just pivoted back to QE. GBP is crashing

King is a big fan of Klaus Schwab's great reset


----------



## m3s

Bank of England is printing money into 10% inflation and a crashing GBP

Can somebody explain the math here? Forgive them if they don't think about monetary policy?

The great reset is nigh?


----------



## Covariance

m3s said:


> Bank of England is printing money into 10% inflation and a crashing GBP
> 
> Can somebody explain the math here? Forgive them if they don't think about monetary policy?
> 
> The great reset is nigh?


Its another Turkey. Home made economics


----------



## james4beach

Covariance said:


> Its another Turkey. Home made economics


And you think Canada is immune to this?

What happens when our housing market starts to tank, and our GDP along with it? After all our whole economy is basically home renovations, mortgage lending, and HELOC consumerism.

Once the real pain starts, do you think the Bank of Canada will continue tightening? Or are they going to pull a BoE and resume QT, perhaps even cut interest rates.

The Bank of England proved today that, when push comes to shove, central bankers will chicken out. This is why many people think the Federal Reserve will ultimately chicken out as well.

If these central banks keep this up, we really are going to have 10% inflation forever. And I mean in the US and Canada, too.


----------



## Covariance

james4beach said:


> And you think Canada is immune to this?
> 
> What happens when our housing market starts to tank, and our GDP along with it? After all our whole economy is basically home renovations, mortgage lending, and HELOC consumerism.
> 
> Once the real pain starts, do you think the Bank of Canada will continue tightening? Or are they going to pull a BoE and resume QT, perhaps even cut interest rates.
> 
> The Bank of England proved today that, when push comes to shove, central bankers will chicken out. This is why many people think the Federal Reserve will ultimately chicken out as well.
> 
> If these central banks keep this up, we really are going to have 10% inflation forever. And I mean in the US and Canada, too.


Nope. Never mentioned Canada, but you are correct it is not immune to Fiscal policy follies.

Massive spending, and tax cuts are not the BOE’s doing. Those are from the elected officials (Fiscal policy).

This is a fiscal policy not monetary policy crisis. The BOE is just trying to save England from its elected officials that decided normal economic reality doesn’t apply to them.

A similar fiasco is happening in Turkey (government leaders pursuing policies that do not help, but rather inflame their monetary and economic problems)


----------



## james4beach

Covariance said:


> Massive spending, and tax cuts are not the BOE’s doing. Those are from the elected officials (Fiscal policy).


I'm not really sure this is about fiscal policy. Tightening financial conditions is, eventually, going to cause stress of some kind.

I think that even if a government runs good fiscal policy, when this kind of liquidity removal is happening (rising rates & QT), things could go haywire any moment. In this particular case it happened to coincide with bad UK policies but I think that's somewhat of a fluke.

US Treasuries are swinging around like crazy these days. Just as easily, it could be some Wall Street investment bank that is caught off-wide on their treasuries positions, and getting margin calls. There have been enormous daily moves in yields and it has nothing to do with the UK... this could cause a blow-up too.

In other words I think the real issue is that tightening conditions and QT will cause market dislocations.

I think the Bank of England is revealing the hand of central bankers: *they're bluffing*. They don't have the balls.


----------



## sags

I see no reason for the BOC to reverse course.

There is increased cost to higher interest rates but it really only hurts debtors the most.

James….has your life changed much due to higher interest rates ?


----------



## james4beach

sags said:


> James….has your life changed much due to higher interest rates ?


I'm a very unusual person. I have zero debts.

Most people have lots of debts, and many mortgage are going to be renewed in the next two years. Many companies also have debts, and their cost of financing is skyrocketing right now.


----------



## Covariance

james4beach said:


> I'm not really sure this is about fiscal policy. Tightening financial conditions is, eventually, going to cause stress of some kind.
> 
> I think that even if a government runs good fiscal policy, when this kind of liquidity removal is happening (rising rates & QT), things could go haywire any moment. In this particular case it happened to coincide with bad UK policies but I think that's somewhat of a fluke.
> 
> US Treasuries are swinging around like crazy these days. Just as easily, it could be some Wall Street investment bank that is caught off-wide on their treasuries positions, and getting margin calls. There have been enormous daily moves in yields and it has nothing to do with the UK... this could cause a blow-up too.
> 
> In other words I think the real issue is that tightening conditions and QT will cause market dislocations.
> 
> I think the Bank of England is revealing the hand of central bankers: *they're bluffing*. They don't have the balls.


agreed. At any one time there is something that can pop up. And in a tightening cycle financial markets are more sensitive to crisis and shocks.

As for rates, this UK situation is an example of what happens when a Govt (elected officials) do not understand we are in a new rate regime. They can’t borrow cheap money in unlimited amounts. The party is over. Their currency will pay the price as it is doing so. Furthermore, their borrowing rates are going up and will stay up because foreign investors will not want their paper unless compensated with high rates. I hope Canada and other Govts are watching.


----------



## Covariance

As of this morning Fed Vice Chair acknowledges recent uncertainty, but says they keep tightening, and are committed to avoiding a premature pull back.


----------



## m3s

sags said:


> James….has your life changed much due to higher interest rates ?


Says the union worker with an indexed pension and rent capped at 2.5% increase

Does anyone know the market rent in London Ontario? sags rent is $1000 which I imagine is at least 50% below the market

Rates take a while to impact someone like this


----------



## Covariance

Closing out the week and quarter, treasuries saw yet again new YTD high (yields) across all maturities. I will not paste the curve, since it's just a shift up from last week. (#625 up thread). Fed Futures? - the story is higher for longer.


----------



## james4beach

Covariance said:


> Closing out the week and quarter, treasuries saw yet again new YTD high (yields) across all maturities. I will not paste the curve, since it's just a shift up from last week. (#625 up thread). Fed Futures? - the story is higher for longer.


Yes this is really amazing. The current belief seems to be that the Fed rate will reach 4.5% to 5% but also that it will remain at the high level for a while.

I think it's just an unpredictable situation. I would never want to make bets on something like this because there are too many possible outcomes with lots of exogenous factors. Inflation could drop, and the Fed could stop hikes any moment. Or inflation could persist for years and the Fed could keep going, maybe to 6% or 7%.

Or who knows, maybe market dislocations and failing institutions forces the Fed to cut rates, like we saw with the BoE resuming QE last week. Maybe we get a financial disaster in Europe and we're back to 1% interest rates, and by 2025 the Fed balance sheet has expanded by another $5 trillion.

Any of these are possible IMO. So I think it's important to make sure you haven't positioned yourself that one of these possibilities would absolutely screw you.

For example being 100% cash is asking to be screwed. Similarly being leveraged equities and/or long term bonds is asking to be screwed.


----------



## sags

The new conservative UK government cancelled their tax cuts for the wealthy.


----------



## james4beach

Nice interview with a Federal Reserve governor this morning. Mary Daly clarifies that they're seeing a strong economy, and more interest rate hikes are needed. She also brings up the good point about wages: even though the job market is strong, *real* wages (after inflation) are down 9% over two years.

Q: Are you going to pivot? Is the Fed going to change its rate path, because the markets are nervous?
*A: We are resolute at raising the interest rate into restrictive territory*


----------



## Covariance

Since Jackson Hole, all the Fed speakers are staying on script.

FYI employment is a trailing indicator. Hours worked is coincident, and I would argue in current conditions more so. Generally, broad based job reductions occur after demand falls. Whereas hours worked drop as orders dry up.


----------



## james4beach

Overnight Index Swaps are a derivatives market that prices/estimates future Bank of Canada rates. As of Friday October 7, the market is estimating 59 basis points of hikes for October 26's BoC decision. So the market is estimating either a 50 or 75 bps hike, leaning towards 50 apparently.

Meanwhile the 2 year Government of Canada bond yields 4.05% which also can be interpreted as a forward-looking prediction of where the BoC rate is headed. This is pretty damn close to the US rate of 4.31%, really just a quarter-point between them.

So at the moment the Fed and BoC rate path looks very similar. Historically that's been the case as well, the two central banks usually have similar policies.


----------



## Beaver101

This is strictly a (my) guess - end of this year, we shall see a 6% one year GIC. [Of course, 2/3/5 years terms will be higher.] Anyone else?


----------



## Covariance

james4beach said:


> Overnight Index Swaps are a derivatives market that prices/estimates future Bank of Canada rates. As of Friday October 7, the market is estimating 59 basis points of hikes for October 26's BoC decision. So the market is estimating either a 50 or 75 bps hike, leaning towards 50 apparently.
> 
> Meanwhile the 2 year Government of Canada bond yields 4.05% which also can be interpreted as a forward-looking prediction of where the BoC rate is headed. This is pretty damn close to the US rate of 4.31%, really just a quarter-point between them.
> 
> So at the moment the Fed and BoC rate path looks very similar. Historically that's been the case as well, the two central banks usually have similar policies.


Futures on Fed Fund Rate => 82% probability of a 75bps raise at their next meeting. One month ago these futures were saying it was => 84% prob of only 50, and 3% prob of the 75.

Given the correlation between the two economies one would expect similar path on rates, but not necessarily the same. Canadian economy is more resource based, and some would argue more dependent on housing. Other nuances as well. We will see.


----------



## AltaRed

Beaver101 said:


> This is strictly a (my) guess - end of this year, we shall see a 6% one year GIC. [Of course, 2/3/5 years terms will be higher.] Anyone else?


I disagree. Bankers won't find enough demand for loans and mortgages @ 7+%. They need a spread of at least 100bp, if not 150bp in their aggregate lending to take on lending risks. One year rates may hit 5-5.25% with longer terms flat to lower than one year rates. A number of alnternative banks are already flat or inverted in their GIC rates (Simplii, EQ Bank, ICICI, Tangerine). More of them to come after the next BoC rate increase which I think will be 50bp, followed by 25-50bp in Dec to end the year at 4-4.25%.


----------



## Beaver101

^ We shall see. It's a guess afterall.


----------



## Covariance

Nothing in todays US CPI will stop the Fed from moving on with another oversized hike. Base case 75 at their next meeting.


----------



## Thal81

Why does it feel like the solution is to fixing the economy is to wreck it even more?


----------



## AltaRed

In order to stop the runaway train (inflation), one has to derail it (the economy). It has always been that way, or at least that was our (boomer) experience in the '70s and '80s inflation battles. Central bankers think they can just apply emergency brakes (soft landing) but that is turning out to be wishful thinking. Consumption (spend) has yet to decrease significantly enough.


----------



## OptsyEagle

In the 70s and 80s they just had to put their foot on the interest rate breaks. They did not have to deal with their governments having another foot pushing the accelerator to the floor at the very same time.

Your citizens running out of money to buy the things they want or need is what stops inflation. Giving more money to them so they can continue with their buying sprees just exacerbates the problem.


----------



## AltaRed

Very true. That is why central bankers will have to work harder and longer with higher interest rates to offset government stupidity (across the western world). Some fiscal relief is warranted for the truly low income folk who would have to revert more and more to food banks but it is just plain stupid to be providing broad relief to the middle class.


----------



## sags

Governments are recording surpluses. Ontario just announced a $2.1 billion surplus for last year. They are paying down debt.

Other Provinces and the Federal government are also recording surpluses. Much of the surplus is from the reduction in government covid support spending.

There is no pressure on government to further reduce spending, and no evidence that they should.

Blanket financial support by the government isn't necessary but is needed to garner widespread support for more funding to those who truly need it.

Consider all the complaining that CERB was not universal, including by CMF members.


----------



## sags

OptsyEagle said:


> In the 70s and 80s they just had to put their foot on the interest rate breaks. They did not have to deal with their governments having another foot pushing the accelerator to the floor at the very same time.
> 
> Your citizens running out of money to buy the things they want or need is what stops inflation. Giving more money to them so they can continue with their buying sprees just exacerbates the problem.


Maybe a year ago, but most government support was removed.

The consumer spending is mostly fueled by debt, as credit card debt continues to rise.


----------



## MrBlackhill

OptsyEagle said:


> Your citizens running out of money to buy the things they want or need is what stops inflation. Giving more money to them so they can continue with their buying sprees just exacerbates the problem.


*Your _rich_ citizens running out of money to buy the things they want is what stops inflation. Giving more money to _the rich_ so they can continue with their buying sprees just exacerbates the problem.


----------



## OptsyEagle

sags said:


> Maybe a year ago, but most government support was removed last year.
> 
> The consumer spending is mostly fueled by debt, as credit card debt continues to rise.


I kind of remember a Prime Minister doubling the GST credits and a few other give aways only a few months ago. Governments are still doing it.

In any case, spending money you did not earn is inflationary. Doesn't really matter whether it is from a government give away, personal lines of credit or outsized government deficits. It all drives up the cost of everything it touches.


----------



## nathan79

sags said:


> Maybe a year ago, but most government support was removed.
> 
> The consumer spending is mostly fueled by debt, as credit card debt continues to rise.


I'm not so sure about that. Some people are clearly in trouble, but a lot of people still have piles of cash from selling RE, crypto and stocks. My own spending is far higher right now than basically ever.


----------



## MrMatt

AltaRed said:


> In order to stop the runaway train (inflation), one has to derail it (the economy). It has always been that way, or at least that was our (boomer) experience in the '70s and '80s inflation battles. Central bankers think they can just apply emergency brakes (soft landing) but that is turning out to be wishful thinking. Consumption (spend) has yet to decrease significantly enough.





AltaRed said:


> Very true. That is why central bankers will have to work harder and longer with higher interest rates to offset government stupidity (across the western world). Some fiscal relief is warranted for the truly low income folk who would have to revert more and more to food banks but it is just plain stupid to be providing broad relief to the middle class.


Both accurate.
The reality is the middle class is going to get the most screwed in this, because they're the part that actually does the work of providing the modern lifestyle, and they're also the ones paying for it.


----------



## AlwaysMissingTheBoat

With all the negativity relating to the U.S. CPI figure this morning, can anyone tell me why the TSX is up substantially today? That includes BCE and bank stocks, so it's not just because the energy sector is looking strong.


----------



## AltaRed

US and TSX indices are now way up after being way negative first thing this morning. I suspect the pundits will have all sorts of explanations in an hour or two.


----------



## OptsyEagle

What I would like to see is a concerted effort to get workers back to work. When I look at the economics I see governments spending more then they earned for decades, as well as the easy money debt citizens racking up debts for whatever they desired over all that same time. All this happened with little or no inflation. All this seems to fly into the face of economic theory...or does it?

I figure the reduced inflation rate was caused by women entering the workplace in the 70s and 80s, driving up our productivity dramatically. Then we had the computer age of the 90s and the internet age after that all driving up productivity. So what happened currently?

Outrageously outsized deficits, by governments coping with Covid, lost productivity from both "work from home", and "long covid" issues, either real or perceived. Lastly, accelerated retirements by many of our most productive citizens, due to covid concerns. That is what I have determined has brought our overdue reckoning to reality.

The biggest risk we all face right now is inflation. It affects us all, big time. It trumps all non-health risks to our future happiness and that of our children, and we need to do whatever it takes and bare whatever pain is required to get it under control.


----------



## OptsyEagle

AlwaysMissingTheBoat said:


> With all the negativity relating to the U.S. CPI figure this morning, can anyone tell me why the TSX is up substantially today? That includes BCE and bank stocks, so it's not just because the energy sector is looking strong.


It's because the investment markets are extremely bearish right now. It is pretty hard to find someone out there that is bullish. Neutral is about as bullish as the most optimistic investor would be right now. What that means is many of those bearish investors have most likely been selling for some time now. Eventually they sell the maximum amount they feel comfortable with.

When you add to the above the fact that markets don't go down because people are bearish or because the markets received bearish news. They only go down because investors are more motivated to sell then the buyers are to buy. Once you are done selling, you can be as bearish as you want, but you cannot make the stock market go down anymore. Once the bearish investors lose their motivation to sell, the motivation of the buyers will drive the stock market back up.

That is what happened today. It is all emotional and can change on a dime but let's just say the sling shot was wound pretty far on the bearish side lately and this kind of move should be expected.


----------



## sags

Looking at the broad market doesn't tell the story of the day.

Every day is different as investors get in and out of different companies and sectors.

Fund managers earn their fees by investing the funds and few of them will tell their clients to sell everything and park in cash.

So they are always moving money around from sector to sector and company to company.


----------



## MrMatt

AlwaysMissingTheBoat said:


> With all the negativity relating to the U.S. CPI figure this morning, can anyone tell me why the TSX is up substantially today? That includes BCE and bank stocks, so it's not just because the energy sector is looking strong.


People imagine all sorts of reasons.
Nobody knows.


----------



## MrBlackhill

AlwaysMissingTheBoat said:


> With all the negativity relating to the U.S. CPI figure this morning, can anyone tell me why the TSX is up substantially today? That includes BCE and bank stocks, so it's not just because the energy sector is looking strong.


----------



## james4beach

OptsyEagle said:


> What I would like to see is a concerted effort to get workers back to work.


The Federal Reserve is working on this one. Knocking down financial markets will force many people back to work. There has been a huge "wealth effect" from the insane market of 2020-2021. Both young and older people have had big gains (including meme stocks and tech stocks) and thought they could retire.

People from the Fed have even said that they want stocks lower due to the [negative] wealth effect. I think it will be healthy and it will force many people back to work, once they realize they aren't as wealthy as they thought.


----------



## AlwaysMissingTheBoat

james4beach said:


> The Federal Reserve is working on this one. Knocking down financial markets will force many people back to work. There has been a huge "wealth effect" from the insane market of 2020-2021. Both young and older people have had big gains (including meme stocks and tech stocks) and thought they could retire.
> 
> People from the Fed have even said that they want stocks lower due to the [negative] wealth effect. I think it will be healthy and it will force many people back to work, once they realize they aren't as wealthy as they thought.


The smart ones took their profits and will buy in again after the worst of the market chaos is over in later 2023. They could become even wealthier that way.


----------



## AltaRed

That is clearly not the majority of people. They buy high and sell low.


----------



## james4beach

What an incredible march higher in yields (interest rates). Here's a chart of US treasury 2 year bond yields. Canadian short term yields are pretty similar and these are also the market's estimate of where the Federal Reserve policy rate is headed.

Interest rates were 0.75% at the start of this year!

This is also a picture of tightening credit.


----------



## Beaver101

^ Indeed! And the year ain't over so there's more room.


----------



## james4beach

Beaver101 said:


> ^ Indeed! And the year ain't over so there's more room.


Although it looks dramatic, we also have to remember the context. We now live in a high inflation environment.

So if inflation is at 7%, borrowing money at 5% or 6% is still really CHEAP. That's still essentially "free money", borrowed at a negative real yield.

These rates are not high yet.


----------



## MrBlackhill

james4beach said:


> So if inflation is at 7%, borrowing money at 5% or 6% is still really CHEAP. That's still essentially "free money", borrowed at a negative real yield.
> 
> These rates are not high yet.


Cheap only if the wage increases as much as the inflation.

No matter the inflation, borrowing is cheap only if your wage increases faster than the interest rate. Or if your investments grow faster than the interest rate.

Unfortunately, if we look back in the 70s, it turns out that wages didn't keep up with the high inflation rate.

At the moment, on the short term (say 2-3 years), it's far from being guaranteed that wages will increase faster than the borrowing interest rate and it's also far from being guaranteed that investments will increase faster.


----------



## james4beach

MrBlackhill said:


> Cheap only if the wage increases as much as the inflation.


You're right, this only works if wages keep up with inflation.


----------



## Covariance

james4beach said:


> Although it looks dramatic, we also have to remember the context. We now live in a high inflation environment.
> 
> So if inflation is at 7%, borrowing money at 5% or 6% is still really CHEAP. That's still essentially "free money", borrowed at a negative real yield.
> 
> These rates are not high yet.


You may wish to check out the ANFCI. It essentially indicates whether financial conditions, in the contemporaneous macroeconomic environment is tight (positive value) or loose (negative value). It’s lagged by a week, and shows the tightening is only really getting started. 






National Financial Conditions Index: Current Data - Federal Reserve Bank of Chicago







www.chicagofed.org


----------



## Covariance

Looks like 75bps for the US Fed in two weeks. And more than likely the same for Canada one week before.

More to come in December for both. Although we may see some divergence at that point.


----------



## Ukrainiandude

“Orange” bank
90 Day Guaranteed Investment
1.50%
180 Day Guaranteed Investment
3.75%
270 Day Guaranteed Investment
4.00%
1 Year Guaranteed Investment
4.85%
1½ Year Guaranteed Investment
5.00%
2 Year Guaranteed Investment
4.70%
3 Year Guaranteed Investment
5.10%
4 Year Guaranteed Investment
4.80%
5 Year Guaranteed Investment
5.20%


----------



## Mechanic

Looks like B2B has a better rate than EQ Bank for HISA. EQ has historically been one of the best but maybe they think they have the lions share now ? Might be time to do a transfer.


----------



## AltaRed

LBC Digital is the retail version of B2B now but no idea why Laurentian suddenly has the need/urge to be a leader rather than a laggard at this time. EQ has been non-competitive on HISA funds for some time, obviously by intent (they don't need more deposits of that kind). One FI's lending business can change in one direction while another FI's lending business goes another way. There is really no need to speculate why. It just is....


----------



## londoncalling

Covariance said:


> You may wish to check out the ANFCI. It essentially indicates whether financial conditions, in the contemporaneous macroeconomic environment is tight (positive value) or loose (negative value). It’s lagged by a week, and shows the tightening is only really getting started.
> 
> 
> 
> 
> 
> 
> National Financial Conditions Index: Current Data - Federal Reserve Bank of Chicago
> 
> 
> 
> 
> 
> 
> 
> www.chicagofed.org


Thanks @Covariance for sharing this link. I posted two graphs from the link to provide some perspective for myself. I remember the panic in 2008-09 and started taking over my investments prior to 2012. I saw 2012 as a good opportunity to buy equities but 2008-09 was still fresh in a lot of peoples' minds. Right now, we are barely above 0 and the risk looks like a tiny red dot. No wonder the general public aren't concerned yet. 



















I am more concerned of what may come if we see continued inflation, further rate increases, rising unemployment and wage growth stalls. Unfortunately, steady growth is near impossible to achieve. I wasn't investing in the 70s and 80s but there are a lot of the same circumstances which could yield similar results. For those complaining about higher rates for borrowing this is why it is necessary. 

What caused inflation in 1980? - DebtInflation

*"What caused inflation in 1980?*
The Fed funds rate, which is the rate banks charge each other for overnight loans, hit 20 percent in 1980, and 21 percent in June 1981. The cause was an inflationary spiral brought on by rising oil prices, government overspending and rising wages. What happened to inflation in 1980s?Inflation reached 9.1% in 1975, the highest rate since 1947. Inflation declined to 5.8% the following year but then edged higher. By 1979, inflation reached a startling 11.3% and in 1980, it soared to 13.5%. A brief recession occurred in 1980.
In the late 1970s, in America, prices were rising fast. In other words, inflation was running rampant, usually thought to be the result of the oil crisis of that era, government overspending, and the self-fulfilling prophecy of higher prices leading to higher wages leading to higher prices. The Fed was resolved to stop inflation."

*What caused the 1980s recession in the United States?*
United States. The early 1980s recession in the United States began in July 1981 and ended in November 1982. One cause was the Federal Reserve ‘s contractionary monetary policy, which sought to rein in the high inflation. In the wake of the 1973 oil crisis and the 1979 energy crisis, stagflation began to afflict the economy.


----------



## james4beach

TDB8150 currently pays 3.15%

Should be higher though. The BoC rate and t-bill yields are now 3.75%.


----------



## Beaver101

^ Last I saw (a couple of days ago) BMO's HISA BMT104(?) was 2.85% - humbug! Will check tomorrow to see if it's the still the same humbug (or not).


----------



## james4beach

Beaver101 said:


> ^ Last I saw (a couple of days ago) BMO's HISA BMT104(?) was 2.85% - humbug! Will check tomorrow to see if it's the still the same humbug (or not).


It should increase. I think this was the same as TD's before the increase.

Next month I'll also review my cash levels and may move more into GICs. It's now possible to get over 5% in GICs from many issuers and even around 5% for one year terms.


----------



## AltaRed

It takes up to 1-7 days for the various ISAs to respond to BoC changes....though Scotia DYN6000 went to 3.65% today and DYN6004 went to 3.8%


----------



## Thal81

Yeah for TDB8150 they increased it pre-emptively to 3.15% a couple days before the annoucement, like they sometimes do. Then they do a second increase shortly after. I'm expecting 3.40% if they maintain the same profit margin as before.


----------



## Covariance

Great time to be a saver.


----------



## james4beach

Is anyone worried that interest rates (anything more than 1 years out) actually appear to be *plummeting* in the last few days?

Look at how bonds are rallying like crazy. While the cash and t-bill rate is rising sharply, all other interest rates are falling fast. Could it be that GIC rates could actually fall from hereon out?


----------



## Covariance

james4beach said:


> Is anyone worried that interest rates (anything more than 1 years out) actually appear to be *plummeting* in the last few days?
> 
> Look at how bonds are rallying like crazy. While the cash and t-bill rate is rising sharply, all other interest rates are falling fast. Could it be that GIC rates could actually fall from hereon out?


Not particularly alarmed by this at the moment. What exactly concerns you? The spread to GICs or the risk free yield curve? Or the level, slope of the curve?


----------



## Beaver101

james4beach said:


> It should increase. I think this was the same as TD's before the increase.
> 
> Next month I'll also review my cash levels and may move more into GICs. It's now possible to get over 5% in GICs from many issuers and even around 5% for one year terms.


 ... yes, it did! From 2.85% to 2.90% ... LOLOLOLOLOLOLOL. And OMG, the US HISA is the same as the CD rate.


----------



## james4beach

Covariance said:


> What exactly concerns you? The spread to GICs or the risk free yield curve? Or the level, slope of the curve?


What concerns me is that interest rates (particularly around 10 years) are falling = easing conditions, while inflation is still extremely high.


----------



## Covariance

james4beach said:


> What concerns me is that interest rates (particularly around 10 years) are falling = easing conditions, while inflation is still extremely high.


The two are unlikely to continue for any length of time acting inconsistently, assuming a credible Fed. 

The market is trying to forecast the pause. We will find out next week if the Fed is in agreement.


----------



## james4beach

Covariance said:


> The market is trying to forecast the pause. We will find out next week if the Fed is in agreement.


Ah, so you believe this is the market thinking the Fed will not be as aggressive. To be honest I don't quite understand what the market is thinking here.

Even if the Fed only does +50, that doesn't mean they are going to start cutting rates. They could easily do 50, or maybe even do no hike at some point, while still bumping the Fed rate higher over the next two years.

Should be an interesting 12 months ahead though.


----------



## Covariance

james4beach said:


> Ah, so you believe this is the market thinking the Fed will not be as aggressive. To be honest I don't quite understand what the market is thinking here.


No, no.
Its two things - an expectation of what the Fed will do, and second an expectaction of what that will in turn accomplish; An expectation that the forecast path of raises brings us up to a peak in Q1, which stays at that level for most of ‘23, and that will be sufficient to get inflation back down by ‘24.


----------



## Freedom2022

james4beach said:


> Is anyone worried that interest rates (anything more than 1 years out) actually appear to be *plummeting* in the last few days?
> 
> Look at how bonds are rallying like crazy. While the cash and t-bill rate is rising sharply, all other interest rates are falling fast. Could it be that GIC rates could actually fall from hereon out?


Recall financial crisis in 2008. The antidote was quantitative easing and rate around 0%. Back then, many people already concerned not to do it too long. They only raise rate and quantitative tightening more than a decade later. They wish everything will be back to normal (inflation 2%) in 2023/2024. It is an elusive dream. I worry history will repeat itself like 1970-1980. We may have interest rate above 10% next year or 15% 10 years later. I was a kid back then. Perhaps others can chime in.


----------



## londoncalling

Freedom2022 said:


> I worry history will repeat itself like 1970-1980. We may have interest rate above 10% next year or 15% 10 years later. I was a kid back then.


I am of the exact same opinion. A major difference this time is we have had decades of negative real wage growth. The middle class was able to whether the storm with tempered expectations. There is certainly a lot more consumer debt and consumption going on. I would be curious know what debt to income was for the population leading up to the time when we last saw major inflation and interest rates. I doubt the majority was a levered as they are now.

added:

Household Debt in Canada Statistics for 2022 - Made in CA

lots of great stats but this one speaks to my comment

"In the 1980s, the average ratio of debt to income was 66% and in the first quarter of 1990, it was around 88.77%. In the second quarter of 2021, the ratio was 173.08%."


----------



## andrewf

londoncalling said:


> I am of the exact same opinion. A major difference this time is we have had decades of negative real wage growth. The middle class was able to whether the storm with tempered expectations. There is certainly a lot more consumer debt and consumption going on. I would be curious know what debt to income was for the population leading up to the time when we last saw major inflation and interest rates. I doubt the majority was a levered as they are now.
> 
> added:
> 
> Household Debt in Canada Statistics for 2022 - Made in CA
> 
> lots of great stats but this one speaks to my comment
> 
> "In the 1980s, the average ratio of debt to income was 66% and in the first quarter of 1990, it was around 88.77%. In the second quarter of 2021, the ratio was 173.08%."


I think because debt to income is so much higher, interest rates have much more leverage on personal spending. 5% hits as hard as 15% used to if debts are 3x higher.


----------



## londoncalling

@andrewf agree 100% 

I now know of 2 people that had planned to start new builds this fall. Both have suspended that plan. One due to interest rate changes since this spring; the other due to material delays and rising labour costs. Both were hoping to leverage up their real estate holdings. One is currently paying almost nothing to principal on their current variable mortgage which will see a payment increase when we get the next hike. The other locked in this spring on a new build recreational revenue property. 8 months into rate hikes and we are starting to see the impacts.


----------



## Mike F

Beaver101 said:


> ^ Last I saw (a couple of days ago) BMO's HISA BMT104(?) was 2.85% - humbug! Will check tomorrow to see if it's the still the same humbug (or not).


 Where did you find the Rate for BMT104, I have looked everywhere and can't find it


----------



## AltaRed

Online when signed in to one's BMO IL account.


----------



## james4beach

Here's a graphic showing how steep today's rate hikes are. This shows the Fed rates, but the BoC path is very similar.

Then again, inflation is extremely high today so one shouldn't really compare to cycles such as 1999-2000 or 2004-2006 when inflation was much lower. It's a whole different world with high inflation.


----------



## MrBlackhill

If they added the 70s and early 80s it would have beaten them all. And, as you noted, the early 80s is the last time we saw high inflation rising fast. That chart seems to have stopped at late 80s for some reason.


----------



## Covariance

Bank of Canada, last three interest rate decisions / rate hikes:
1%, 0.75%, 0.50%

This is a slowing of the rate of increase.


----------



## OneSeat

BMO-IL GIC rates down slightly this morning
- but HISA up from 2.90% to 3.25%.

Just to keep us guessing.


----------



## AltaRed

MrBlackhill said:


> If they added the 70s and early 80s it would have beaten them all. And, as you noted, the early 80s is the last time we saw high inflation rising fast. That chart seems to have stopped at late 80s for some reason.


They didn't show it because the author had a particular story to tell and didn't want it diminished by even more dramatic data from an earlier time. There is always a motive to presentation.


----------



## james4beach

AltaRed said:


> They didn't show it because the author had a particular story to tell and didn't want it diminished by even more dramatic data from an earlier time. There is always a motive to presentation.


I agree. There are an increasing number of personalities on TV who are shouting the message "the central banks have gone overboard" and are trying to argue for less restrictive policy. Fed tightening is generally bad for a lot of people on Wall Street, especially hedge funds, advisors, and salespeople. It's also very bad for IPOs, SPACs and everything else that was tied to "easy money".

Restrictive policy deters people from risk-taking behaviour, which is part of the point by the way, and that's very bad for shills and salespeople who are trying to sell products.

One of the funniest ones is Jeremy Siegel. He's a regular guest on CNBC. Every couple days, Siegel goes on TV and whines that the Fed is about to destroy the economy, we need lower interest rates now!


----------



## sags

Professor Siegel supported raising interest rates, but contends that it takes years for the full impact of rate hikes to work their way through the economy.

His point is not to cut rates, but to stop raising them lest the Fed overshoot and cause a deeper recession than necessary.

A lot of people are coming to the same conclusion now. Personally, I would rather see them halt rate increases and let inflation burn itself out.

At this point, higher interest rates are only adding to inflation as people cannot control the major factors effecting inflation....shelter, food, fuel.

There is scant evidence of demand destruction for the main factors of inflation.


----------



## andrewf

james4beach said:


> Here's a graphic showing how steep today's rate hikes are. This shows the Fed rates, but the BoC path is very similar.
> 
> Then again, inflation is extremely high today so one shouldn't really compare to cycles such as 1999-2000 or 2004-2006 when inflation was much lower. It's a whole different world with high inflation.
> 
> View attachment 23789


Is the other takeaway that this tightening cycle will probably pause after going up by 4%? To be honest, we'll likely be well into recession by the time we reach 4% hike.


----------



## andrewf

A source that goes back to the 70s tightening cycles.


















Innovator ETFs


Innovator offers investors a full range of Defined Outcome ETFs on equity markets around the world. Advisors can create a globally-allocated equity portfolio with built-in buffers.




www.innovatoretfs.com


----------



## Covariance

andrewf said:


> Is the other takeaway that this tightening cycle will probably pause after going up by 4%? To be honest, we'll likely be well into recession by the time we reach 4% hike.


Canada is decelerating rate increases as mentioned up thread. A recession this winter is more than likely. The BoC has determined they can take this course of action (against inflation) because the recession will take care of employment cost pressures (in other words unemployment goes up). So in answer to your question - maybe one or two 25s from BoC from here. Their next meeting is in December and as we are in transition a definitive answer needs to await data that will print between now and then

US is a different matter and to be honest I don't know until I hear what the Fed has to say tomorrow.


----------



## AlwaysMissingTheBoat

U.S. job market remains hot.


THE ASSOCIATED PRESS
WASHINGTON (AP) -- U.S. job openings rose unexpectedly in September, suggesting that the American labor market is not cooling as fast as the inflation fighters at the Federal Reserve hoped.

Employers posted 10.7 million job vacancies in September, up from 10.2 million in August, the Labor Department said Tuesday. Economists had expected the number of job openings to drop below 10 million for the first time since June 2021.

For the past two years, as the economy rebounded from 2020's COVID-19 recession, employers have complained they can't find enough workers. With so many jobs available, workers can afford to resign and seek employment that pays more or offers better perks or flexibility. So companies have been forced to raise wages to attract and keep staff. Higher pay has contributed to inflation that has hit 40-year highs in 2022.

In another sign the labor market remains tight and employers unwilling to let workers go, layoffs dropped in September to 1.3 million, fewest since April. But the number of people quitting their jobs slipped in September to just below 4.1 million, still high by historical standards.

To combat higher prices, the Federal Reserve has hiked its benchmark interest rate five times this year and is expected to deliver another increase Wednesday and again at its meeting in December. The central bank is aiming for a so-called soft landing -- raising rates just enough to slow economic growth and bring inflation down without causing a recession.

Fed Chair Jerome Powell has expressed hope that inflationary pressure can be relieved by employers cutting job openings, not jobs.


----------



## james4beach

A pause in one (or two) rate hikes doesn't mean the rate hike cycle has ended. I think the market has the wrong idea about the trajectory of rate hikes.

As long as the CPI is increasing at a fast pace (high year over year % inflation) I think rates will keep moving up. The BoC may skip a rate increase or two, but that doesn't mean rates are going lower any time soon.


----------



## Covariance

james4beach said:


> A pause in one (or two) rate hikes doesn't mean the rate hike cycle has ended. I think the market has the wrong idea about the trajectory of rate hikes.
> 
> As long as the CPI is increasing at a fast pace (high year over year % inflation) I think rates will keep moving up. The BoC may skip a rate increase or two, but that doesn't mean rates are going lower any time soon.


I agree there is a non-zero probability the current expectation is an error. Inflation may be more persistent and require higher rates. Not my base case, but certainly a possibility. The primary signal for me is employment and wage pressures. As long as people are working they will spend everything they make, and do so on an amplified basis because of leverage.


----------



## damian13ster

Is BoC not concerned about Canadian dollar at all? With resources close to all time highs, CAD is unusually low. Slowing rate hikes now is likely to drop it even lower. 
Resources are expected to continue staying high, as we continue to shoot ourselves in the foot when it comes to development, but if they end up dropping then CAD will be in free-fall


----------



## AltaRed

The loonie is not nearly as much a petro-dollar as it used to be as little as 10 years ago. O&G is now about 16% of GDP (or thereabouts) versus over 20% and beyond in years gone by. I have not checked those numbers in the last year or so so may not have them quite right, but the trend to O&G being a decreasing portion of the economy has been a trend for some time. It is possible it may become more of a factor when TMX goes into operation late 2023 but I don't know for sure.

Point is the loonie is not tied as much to O&G as it used to be. The bigger issue for the faltering loonie is Canada's continued slippage in productivity relative to the USA in particular and higher costs of doing business in recent years. Our GDP per capita just is not keeping up. There is far less risk of a deep dive in loonie value than there is continued long term erosion. BoC helps shore up the loonie with overnight rates that usually are a bit higher than those of the USA but I think it is more a case of our sovereign debt growth and productivity that are the main culprits.

There is not a whole lot to worry about with our loonie in the 72-78 cent range. It might be the more appropriate long term trading range to help balance our current account import/export issues.


----------



## james4beach

Yeah, the Canadian economy has diversified more. The CAD / USD pair has been pretty stable over the last few years actually. Yes at the moment the USD is a bit higher but in global context, this currency pair is pretty stable.

Also don't forget, a lower loonie is good for exports. I'm an exporter myself and the slightly lower CAD boosts the $ that I bring in... no complaints from me.

The first is a chart of CAD vs USD and the second is versus Swiss Francs, generally regarded as a stable currency. We are certainly range-bound and I don't see any reason to worry about the CAD here.


















By the way ... Federal Reserve interest rate decision is tomorrow!


----------



## damian13ster

Yeah, but they have no choice but to raise by 0.75 and not to change a tone at all. Economic data doesn't justify any other approach


----------



## Covariance

damian13ster said:


> Is BoC not concerned about Canadian dollar at all? With resources close to all time highs, CAD is unusually low. Slowing rate hikes now is likely to drop it even lower.
> Resources are expected to continue staying high, as we continue to shoot ourselves in the foot when it comes to development, but if they end up dropping then CAD will be in free-fall


BoC is concerned with inflation and not the maintaining or controlling the level of the exchange rate.

If the CAD$ becomes worth less there is an impact on inflation because imported goods cost more for Canadians. All else being equal this would lead to higher rates as the BoC tries to get inflation back to target.

It's worth noting that in their recent MPR, released last week, they project 0.74 which is down from the prior assumptions (0.78 in the July report, and 0.79 in the April).


----------



## nathan79

Covariance said:


> It's worth noting that in their recent MPR, released last week, they project 0.74 which is down from the prior assumptions (0.78 in the July report, and 0.79 in the April).


So they've been extremely wrong just like their inflation predictions have been wrong. Maybe they will get it right eventually since even a broken clock is right twice a day. I see the dollar falling, inflation rebounding, and the BoC forced to hike rates more.


----------



## james4beach

Fed rate decision is at 2 pm eastern... an hour to go


----------



## AltaRed

Scotia iTrade didn't wait. They jacked up their USD ISA to 3.5% earlier this morning (75 bp). TD jumped their offering to 3.25% (50bp)


----------



## james4beach

AltaRed said:


> Scotia iTrade didn't wait. They jacked up their USD ISA to 3.5% earlier this morning (75 bp). TD jumped their offering to 3.25% (50bp)


Yes that was interesting. I noticed yesterday that TDB8152 had already changed.


----------



## AlwaysMissingTheBoat

james4beach said:


> Fed rate decision is at 2 pm eastern... an hour to go


75 basis points is highly anticipated. 50 and a dovish tone would boost the markets and help prime things for the Democrats with the midterms around the corner. A full 100 and hawkish tone would be the death-knell for the Dems in the midterms.


----------



## newfoundlander61

I am going to say a 50 point increase today.


----------



## james4beach

The Fed raised by the expected 75 basis points. Here's where the two central banks stand:

Fed rate "3.75% to 4.00%" with effective Fed funds rate at about 3.83%
Bank of Canada policy rate is 3.75%

There we go, the Fed and BoC have virtually the same rate.


----------



## james4beach

I watched Powell's press conference a couple of minutes ago and three things stood out to me:

(1)
"The risk of doing too little outweighs the risk of doing too much" -- regarding tightening. Powell explained that if the Fed over-tightens, they have plenty of tools to ease conditions again. However if they under-tighten and inflation becomes entrenched, it's very hard to solve that situation. Powell is saying that on the balance of things, he would rather raise interest rates too much than risk seeing inflation become entrenched.

(2)
"Inflation has not been coming down". He said that every indicator they are watching shows persist inflation, with no signs of a decrease yet. Wow.

(3)
He was unambiguous that further tightening is needed, they will tighten conditions further, and they have a LONG WAY TO GO still.


_By the way, Bloomberg TV, which is free, is the place to watch live events like this one. I watch it on my Roku. They suspend the ads during big events, but otherwise the ads make it pretty painful to watch._


----------



## Covariance

james4beach said:


> The Fed raised by the expected 75 basis points. Here's where the two central banks stand:
> 
> Fed rate "3.75% to 4.00%" with effective Fed funds rate at about 3.83%
> Bank of Canada policy rate is 3.75%
> 
> There we go, the Fed and BoC have virtually the same rate.


They are exactly the same in fact, for the time being. 3.75% is the rate they will pay an accredited bank that deposits funds with them overnight. And 4.0% is the rate they will charge for an overnight loan. The US releases the explicit spread whereas the BoC just issues the deposit rate.


----------



## Covariance

nathan79 said:


> So they've been extremely wrong just like their inflation predictions have been wrong. Maybe they will get it right eventually since even a broken clock is right twice a day. I see the dollar falling, inflation rebounding, and the BoC forced to hike rates more.


Quite possible. In the mean time the Fed seems inclined to continue to push higher and not wait.


----------



## AltaRed

US inflation is worse with no sign of letting up. The US Fed really cannot (should not) consider anything else but to stick to their guns.


----------



## Ukrainiandude

AltaRed said:


> US inflation is worse with no sign of letting up.


I say Canadian inflation is worse. Real inflation of course.
meanwhile 
stocks loved today’s news


----------



## james4beach

There's been a really sharp move higher in Canadian interest rates in the last week (bond yields moving much higher), both the 5-year and 10-year bonds.


----------



## Covariance

james4beach said:


> There's been a really sharp move higher in Canadian interest rates in the last week (bond yields moving much higher), both the 5-year and 10-year bonds.


The employment report last Friday came in hotter than expected. Begs a question as to whether BoC will need to press higher than was previously expected.


----------



## james4beach

Covariance said:


> The employment report last Friday came in hotter than expected. Begs a question as to whether BoC will need to press higher than was previously expected.


Thanks for pointing that out, I had missed that. You're right, that's a strong employment report and is showing a pretty high rate of wage increases. So wages are clearly rising.

That does put more pressure on inflation and should require higher BoC rates.


----------



## londoncalling

B Of C needs to keep raising. I don't like what that will do to my portfolio but it is the lesser of two evils. The only things that has saved us from going into a tail spin are pent up demand and a high employment rate. We haven't even begun to feel the squeeze yet but everyone knows it's coming. Rate forecasts are still predicting central banks will do an about face.


----------



## sags

This inflation is caused by supply chain disruptions and higher interest rates won't solve that problem.

That is why higher rates have been largely ineffective so far.


----------



## damian13ster

Any why do you think they have been ineffective?
Do you know what inflation would be without them?

There still is highly inflationary fiscal policy and money supply is still 5x what it should be - it takes time, but to say higher rates have been ineffective is just not correct


----------



## londoncalling

sags said:


> This inflation is caused by supply chain disruptions and higher interest rates won't solve that problem.
> 
> That is why higher rates have been largely ineffective so far.


Some of it is supply chain related but not all of it. We can either increase supply or kill demand to achieve the same outcome. Certain items will always be in demand but we can change demand by substitution. ex groceries, discretionary spending etc. Some costs cannot be substituted.

We were also told it was transitory. Sometimes one has to questions things. Rarely, is there only one factor for the current situation. Don't believe everything you are told. It takes months for the changes to monetary policy to work its way through the system.


----------



## sags

Wait until all the mortgages that have to be renewed are due and the payment doubles or more.

The pain from higher interest rates hasn’t been felt by the masses yet.

If people think 8% inflation is bad they are in for a big surprise when they see their new mortgage payment.

You can mitigate inflation best as you can but the banks want their mortgage payment in full every month.

I knew people who lost their homes in the 1980s and with the size of mortgages these days it will be much worse.

I don’t recall anyone going broke because of their grocery bill or gas for the car.


----------



## james4beach

Yes, rising mortgage rates are painful.

But you know what would be even more painful? Failing to eliminate inflation. We could then end up with 15% or 20% mortgages, and would that be any better?

Not to mention, it would kill corporate financing and also make it almost impossible to run a business due to the instability of inflation. I would much rather have a recession (and pain) now, and wipe out the inflation.

I've lost a ton of money in the last year but I say... bring it on. Short term pain for long term gain. Remember that after Volcker dished out his "medicine", the economy entered a beautiful and long stretch of expansion with stable interest rates, stable inflation.


----------



## sags

High interest rates aren’t going to stop the war in Ukraine, put water in the dried up Mississippi so multi-billions in trade can be transported on barges, halt the lockdowns in China.

They will make everything more expensive though.

Paul Volker was dealing with a completely different economy when there was no global supply chains dependency like today. There was far less debt.

Would he take the same path today ?

Imagine 13% inflation and 20% interest rates today with all the outstanding debt to service.

That would be equivalent to 8% inflation today and 12% interest.

Here is your mortgage renewal….$500,000 at 12% interest….. yikes.

I hope interest rate hikes conquer inflation but my hope doesn’t reflect any confidence


----------



## londoncalling

People handed over the keys to their homes during the Volker years and they did it again in 2008. If there is 12% interest on $500k mortgages the banks will become property owners and be liquidating those homes to get back what they can to preserve their balance sheets as best they can.


----------



## MrBlackhill

I wonder if there was a housing supply issue back then?

Because today I wonder where would the people live if they sell their house. I mean, they'll sell their house to buy a cheaper one, and the owner of the cheaper one will sell to buy an even cheaper one, and then that owner may sell and start renting, until those at the bottom of that chain are kicked out of the rental market and start living... in the streets?


----------



## james4beach

Apparently Airbnb owners in the US are getting destroyed on a sharp crash in bookings.

And many people stretched their finances to buy a "rental property". Well good luck to them! What kind of mortgages did they take out for their hot new Airbnb business?

I wonder how Airbnb owners in Canada are doing?


----------



## sags

A lot of these "disruptive" businesses are getting disrupted.


----------



## londoncalling

Not that I want to see anyone suffer but that is what leverage is all about. when it goes well you look like a genius. when it doesn't you feel the squeeze in a big way. Not much different than loan sharking. 

Am hoping to get some vacation bargains when the recession starts. It's about time fiscally prudent folks were rewarded.


----------



## AltaRed

Signs may be showing pretty soon but most winter vacations were booked months ago and are fully committed too (beyond cancellation dates). I am thinking the summer cruise season, especially European river cruises may start offering big discounts. Some of it is showing up in Viking and Scenic brochures and emails we get regularly for the 2023 season but I don't see any dramatic offers yet.


----------



## AlwaysMissingTheBoat

AltaRed said:


> Some of it is showing up in Viking and Scenic brochures and emails we get regularly for the 2023 season but I don't see any dramatic offers yet.


As much as anything, those river cruises need water! Low river levels wreaked havoc in some parts of Europe (and elsewhere) this year.


----------



## Covariance

Canadian inflation this morning was essentially as expected. BoC either 25 or 50 at their next meeting (Dec).

On the US side, strong retail sales is another supporting data point for the current expectation of a 50 at their next meeting (Dec).


----------



## MrMike

londoncalling said:


> Not that I want to see anyone suffer but that is what leverage is all about. when it goes well you look like a genius. when it doesn't you feel the squeeze in a big way. Not much different than loan sharking.


It sounds like you're suggesting taking out loans is a bad thing but to be fair though, most business start off with loans. Some make it, some don't - and the ones that don't may not have even done anything wrong other than poor timing. Doesn't mean other shouldn't try or that it was a bad idea.


----------



## damian13ster

MrMike said:


> It sounds like you're suggesting taking out loans is a bad thing but to be fair though, most business start off with loans. Some make it, some don't - and the ones that don't may not have even done anything wrong other than poor timing. Doesn't mean other shouldn't try or that it was a bad idea.


Yeah, that's why there are such things as 'good loans' and 'bad loans'. Good loans have positive ROI. Bad loans don't and are mostly for consumerism purposes. Same applies to national debt


----------



## AltaRed

Covariance said:


> Canadian inflation this morning was essentially as expected. BoC either 25 or 50 at their next meeting (Dec).
> 
> On the US side, strong retail sales is another supporting data point for the current expectation of a 50 at their next meeting (Dec).


Target is way off on their results so retail is starting to take a hit in select places, but until revenue and earnings is off on a broader range of discretionary consumer spend, there won't be a turning of the corner.


----------



## londoncalling

MrMike said:


> It sounds like you're suggesting taking out loans is a bad thing but to be fair though, most business start off with loans. Some make it, some don't - and the ones that don't may not have even done anything wrong other than poor timing. Doesn't mean other shouldn't try or that it was a bad idea.


As a former business owner operator I agree with you 100%. Very few can start a business without a loan, same with buying a house. Although not clearly outlined my post was more about leveraging loans to buy property that does not have proper cashflow with the mindset that values will go up indefinitely. There is nothing wrong with making speculative plays but don't expect me to bail you out. Credit is a tool and should be used properly. Sadly, misfortune and bad timing is something we can't predict with accuracy. This is why it is important to have a margin of safety factored into these decisions or at least a plan of what to do if/when... I find many that fail as business owners only see the upside. The majority of failed businesses rarely are the result of just bad luck.


----------



## Covariance

Nothing out of line in today’s release of Fed meeting minutes. Speeches and interviews of Fed officials in the days since the meeting have already delivered the message.


----------



## Covariance

I just noticed today the TD ISA in CAD is 3.25% whereas it is 3.4% in USD

given the expected path of Canada & US policy rates we can expect this to widen in the months ahead


----------



## AltaRed

Maybe. Some like BMO and Scotia have their CAD ISAs at 3.65% and USD at 3.5%.


----------



## AltaRed

james4beach said:


> Would have been nice to keep it on topic -- for interest rates.


Then moderators may need to moderate better. The latest trolling seems to have started with post #754.


----------



## nathan79

Covariance said:


> Canadian inflation this morning was essentially as expected. BoC either 25 or 50 at their next meeting (Dec).
> 
> On the US side, strong retail sales is another supporting data point for the current expectation of a 50 at their next meeting (Dec).


The consensus for BoC seems to be 25, but inflation staying at 6.9% should guarantee at least 50. If they do 25 that sends the message they've given up.


----------



## cainvest

AltaRed said:


> Then moderators may need to moderate better. The latest trolling seems to have started with post #754.


Good idea to use the report button then moderators can check into it.


----------



## Gator13

nathan79 said:


> The consensus for BoC seems to be 25, but inflation staying at 6.9% should guarantee at least 50. If they do 25 that sends the message they've given up.


I am predicting 50. They are going to start running up against a wall.

They have no control on food or energy.


----------



## MrBlackhill

The Bank of Canada lost $522 million in the third quarter of this year, marking the first loss in its 87-year history. In the central bank's latest quarterly financial report, it says revenue from interest on its assets did not keep pace with interest charges on deposits at the bank.









Bank of Canada lost $522 million in third quarter, marking first loss in its history


The Bank of Canada lost $522 million in the third quarter of this year, marking the first loss in its 87-year history. In the central bank's latest quarterly financial report, it says revenue from interest on its assets did not keep pace with interest charges on deposits at the bank.




www.ctvnews.ca


----------



## james4beach

Canadian derivative markets are pricing in a 45 basis point BoC hike on December 7.

Possibly related, the recently released Canadian GDP numbers came in just slightly higher than expected.

Myself, I think BoC policy is still too stimulative and they haven't tightened conditions enough yet. I am expecting inflation to remain persistently high at around 5%, mainly because I don't think the BoC will raise rates enough or do enough QT. From the way these central bankers talk, it doesn't sound to me like they want to raise rates very far.


----------



## damian13ster

No write-down on value of the bonds?


----------



## AltaRed

james4beach said:


> Canadian derivative markets are pricing in a 45 basis point BoC hike on December 7.
> 
> Possibly related, the recently released Canadian GDP numbers came in just slightly higher than expected.
> 
> Myself, I think BoC policy is still too stimulative and they haven't tightened conditions enough yet. I am expecting inflation to remain persistently high at around 5%, mainly because I don't think the BoC will raise rates enough or do enough QT. From the way these central bankers talk, it doesn't sound to me like they want to raise rates very far.


The problem is the risk of too much overshoot. It takes quite awhile for interest rate increases to work themselves through the system. That said, consumer spending remains stubbornly high and the unemployment rate isn't going to change much, not with 1 million job vacancies needing to be worked off to some degree first.


----------



## Covariance

Under the covers the GDP numbers were less than impressive for real domestic economic activity. Specifically, real final domestic demand contracted. Contracted being the harbinger to recession. Without exports exceeding imports or the inventory build rGDP would have been negative.


----------



## Covariance

Expect this mornings employment reports in the US and CAD to further support rate increases at the next meetings. Average hourly earnings for both are >5% YoY and thus putting pressure on inflation.


----------



## james4beach

The Fed just raised 50 basis points.

Powell clarified that Fed policy is not yet restrictive enough. The FOMC committee appears to be in agreement (unanimous I think) that further rate hikes are necessary; inflation risks remain to the upside. The BoC and Fed rates are now equal.


----------



## MrMatt

james4beach said:


> The Fed just raised 50 basis points.
> 
> Powell clarified that Fed policy is not yet restrictive enough. The FOMC committee appears to be in agreement (unanimous I think) that further rate hikes are necessary; inflation risks remain to the upside. The BoC and Fed rates are now equal.


Well I'm now even more concerned about overshoot.
They should have come out hard at the beginning, but now they're clearly aiming for a recession, and to get more people unemployed..


----------



## KaeJS

MrMatt said:


> Well I'm now even more concerned about overshoot.
> They should have come out hard at the beginning, but now they're clearly aiming for a recession, and to get more people unemployed..


Yes, they should have.


----------



## AltaRed

That is hindsight given what was really known late 2021/early 2022. Overshoot was just as monumental then as it is now given the data that was known at the time. Woulda/shoulda/coulda isn't helpful now. Just be glad it isn't 1970 or so when data lags were far worse. There is just no way to know forward behaviour. Only a best guess.


----------



## damian13ster

MrMatt said:


> Well I'm now even more concerned about overshoot.
> They should have come out hard at the beginning, but now they're clearly aiming for a recession, and to get more people unemployed..


They screwed up at the beginning but no time travel so have to deal with reality.
And reality is that inflation expectation is still above 5%. Until that comes down, messaging has to be stern.
Also, the result might not necessarily be higher unemployment. It can also be increase in labor participation rate as asset inflation decreases


----------



## londoncalling

AltaRed said:


> Just be glad it isn't 1970 or so when data lags were far worse.


I don't think we will see things get as bad as back then but as you said in your post there is no way to know forward behaviour. 




damian13ster said:


> They screwed up at the beginning but no time travel so have to deal with reality.
> And reality is that inflation expectation is still above 5%. Until that comes down, messaging has to be stern.
> Also, the result might not necessarily be higher unemployment. It can also be increase in labor participation rate as asset inflation decreases


As annoyed as I am that perhaps (or perhaps not) things may have turned out differently had action been taken earlier, it really is time to move on. There is a strong possibility of an overshoot but if demand won't subside and inflation won't come down they need to kill demand. An increase in labour participation would make things even more interesting. It would be great to fill the vacancy rate without decreasing the number of workers. In the meantime steady as she goes...


----------



## james4beach

Does anyone think that CPP indexing to inflation (CPI) is rock solid, or if high inflation continues for a few years could there start to be political pressure to not give inflation increases?

Imagine we have 6% inflation for the next 6 years. That would be a 42% increase in CPP payouts.


----------



## KaeJS

james4beach said:


> Does anyone think that CPP indexing to inflation (CPI) is rock solid, or if high inflation continues for a few years could there start to be political pressure to not give inflation increases?
> 
> Imagine we have 6% inflation for the next 6 years. That would be a 42% increase in CPP payouts.


I think they will always increase CPP.


----------



## MrMatt

damian13ster said:


> They screwed up at the beginning but no time travel so have to deal with reality.


it was obvious then, and it's even more obvious now.

It is very clear to me that the "experts" are idiots, and we should dramatically limit the power of government, because they're simply not good at doing their jobs.
They have been granted incredible power, which they wield carelessly, hurting ordinary people.


----------



## AltaRed

BoC is not government though the governor is picked by government for a certain term. Clearly all central bankers in the G7, if not much of the G20, got it very wrong. Someone has to have hands on the tiller and one certainly doesn't want the jackals in government to do it. There are folks like Erdogan and Bolonsaro who overrode their governments as regards raising interest rates and both countries are in inflationary trouble, the difference being Bolonsaro is on his way out if he actually cedes power and the ship might be appropriately captained.


----------



## londoncalling

KaeJS said:


> I think they will always increase CPP.


I think if the gov't reduces or eliminates the inflation adjustment we would have to be in a very dire situation. There are many other measures that will be taken before reducing CPP payouts. I know many are concerned that the current large aging population will draw down the hefty CPP coffers. I think the previous adjustments were done with that in mind. I expect if there is any long term shortfall the government would increase the contribution amount, delay age of eligibility or increase penalty for early withdrawal before removing indexation. They would also look to revampinging OAS before touching the holy grail of canadian retirement income.


----------



## damian13ster

MrMatt said:


> it was obvious then, and it's even more obvious now.
> 
> It is very clear to me that the "experts" are idiots, and we should dramatically limit the power of government, because they're simply not good at doing their jobs.
> They have been granted incredible power, which they wield carelessly, hurting ordinary people.


The experts had a political agenda.
Don't believe they are idiots - they simply want to survive until next election cycle


----------



## MrMatt

damian13ster said:


> The experts had a political agenda.
> Don't believe they are idiots - they simply want to survive until next election cycle


Well either they're idiots who don't know what they're doing.

Or they're evil people who aren't working in our best interests.

"Never ascribe to malice, that which can be explained by incompetence."


----------



## damian13ster

Like you mentioned, it was evident to anyone with semi-decent amount of braincells.
Do I believe none of the central bankers possess enough of the braincells to be aware what they were doing - no.
The issue is defining 'our interest'. They worked against best interests of middle class, lower middle class, and working poor. They worked for best interest of politicians, homeowners, and the rich. So the assessment of whether they are 'evil' or not depends on your definition of 'our'.

When it comes to interest rates I believe we will be in 4-5.5% for a long time. If they start lowering, which they might be tempted to in 2023, then 1970s might be back.
The defining factor will be elections. If they aren't expected until 2025, then there is a chance they will act responsibly. If there are indications of elections coming earlier - the central bank will print more money for government's election campaign


----------



## sags

What is evil about interest rates returning to historic norms ? Is this your first rodeo ?


----------



## sags

The tone on CNBC from investors and fund managers has changed dramatically overnight. Everyone has gone full bore bearish.

All the economic data coming out in the US portends a succession of necessary future interest rate hikes by the Fed well into 2023 and perhaps 2024.

The "soft landing" is more myth than reality and stocks will get hit accordingly. Asset prices are going to decline, including house prices.

CEOs are continually lowering guidance and future earnings projections. Analysts are lowering ratings on many stocks.

Technology and digital stocks are looking more like the 2000 dot com scenario. Roblox, Apple, Meta, Alphabet, ARKK, and similar companies and funds are getting thrashed.

The Nasdaq is down 3% as I post this. It is all about real corporate earnings and debt loads now.

The economy has rolled over and is heading into a recession and the reality has set in for investors.

Buckle up and prepare accordingly.


----------



## MrMatt

I think mid single digits is a "good" place for rates, with inflation at half that.

I think years of neverending stimulus and other inflationary policies are a big part of our economic problems today.


----------



## AltaRed

The last decade is the prime example of cheap credit, amplified by the injection of steroids during the pandemic. Lots of errors made in hindsight but at the time, they made sense given the alternatives such as:
1) the decade of cheap credit - inflation was so low at <2%, there was real risk of deflation which could have been a legitimate economic collapse
2) the pandemic - not knowing when the economy would get moving again. The lack of spending $1 has an economic impact of $7 using the rule of thumb multiplier. It needed to be kept on life support at the opposite risk of potential collapse.

There is no mystery there. The real risk is governments wanting to keep the money flowing so as to enable their re-election. The voting public has gotten used to largesse and it is hard to rein it back in like was done in pre-2000 decades when it had to be reined in.


----------



## damian13ster

And every dollar printed has impact of 9$ with current reserve requirement.

So no, at the time it didn't make sense. You didn't need hindsight to know that what was being done was stupid.
It was done for political reasons sadly and now lower middle class and working poor needs to bend over and take one for the team because populists in government decided to buy elections without any regard for consequences


----------



## Covariance

Outside the spot light on central banks, we saw US retail sales print this morning. Worse than expected and a month/over/month decline. And thus demand is getting weaker.


----------



## MrMatt

damian13ster said:


> And every dollar printed has impact of 9$ with current reserve requirement.


I thought there was no reserve requirement.


----------



## james4beach

AltaRed said:


> There is no mystery there. The real risk is governments wanting to keep the money flowing so as to enable their re-election. The voting public has gotten used to largesse and it is hard to rein it back in like was done in pre-2000 decades when it had to be reined in.


I agree with your entire assessment. It has been a long period of cheap credit and low interest rates and it's true that (until about 2019 in my opinion) those low rates seemed justified. Things started to get really nuts in 2019, before the pandemic, where the tech bubble started to become really wild, an IPO mania was under way, and real estate was also going nuts. In hindsight I wish they would have started tightening policy or at least ended QE back then, before the pandemic.

And while I am happy about the way central banks are tightening policy today, I share your same concern about the political risk. *A society that's become addicted to 0% interest rates* obviously hates higher interest rates. In the eyes of the general public, higher interest rates directly make their lives worse and they would prefer a return to easy & free money, plus of course home prices that only ever go up -- fuelled by cheap mortgages.

That's what the public (voters) want, unfortunately.


----------



## damian13ster

MrMatt said:


> I thought there was no reserve requirement.


Wasn't capital requirement just raised to 11%?
So the effect of dollar printed would be 1/11%?


----------



## MrMatt

damian13ster said:


> Wasn't capital requirement just raised to 11%?
> So the effect of dollar printed would be 1/11%?


Someone else (m3s?) is claiming there is no reserve requirement.

But it doesn't matter if $1 has $9 of impact, dollars are an arbitrary unit of agreed value.


I'm hoping they can normalize rates, I'm just concerned how much pain they will inflict to do so.


----------



## Juggernaut92

Aren't the bank of canada and federal reserve indepent of the federal government? Politicians in both countries can claim they will make changes to the central bank and the interest rates but can they really?

The opposite side of the coin is a country like Turkey (as someone mentioned above) where the government can push their own agenda and can axe the plan of the central bank to the detriment of the country.


----------



## damian13ster

In theory? Yes. In practice? No.
The moment central bank started buying government debt and basically funding deficits by printing money - any shred of independence was gone. Theoretically there is operational independence and target dependence, but in practice there is no independence at all


----------



## MrMatt

Juggernaut92 said:


> Aren't the bank of canada and federal reserve indepent of the federal government? Politicians in both countries can claim they will make changes to the central bank and the interest rates but can they really?


Theoretically there is separation.

Bank of Canada is quite independant. But the Government is allowed to change the mandate and appoint the governor etc.
I'm sure there is some level of influence, arguably a significant level.

But the BoC is far less under the influence than the Attorney General, where the PM can simply fire and replace them.

Similarly the Supreme court is arguably under less control, since the PM can only appoint members, and so far they've been loathe to intrude too much into their jurisdiction.

Quite simply Canada has too much concentration of power in the PMO.
Unlike the US where the power is at least theoretically spread out.


----------



## Covariance

james4beach said:


> I agree with your entire assessment. It has been a long period of cheap credit and low interest rates and it's true that (until about 2019 in my opinion) those low rates seemed justified. Things started to get really nuts in 2019, before the pandemic, where the tech bubble started to become really wild, an IPO mania was under way, and real estate was also going nuts. In hindsight I wish they would have started tightening policy or at least ended QE back then, before the pandemic.
> 
> And while I am happy about the way central banks are tightening policy today, I share your same concern about the political risk. *A society that's become addicted to 0% interest rates* obviously hates higher interest rates. In the eyes of the general public, higher interest rates directly make their lives worse and they would prefer a return to easy & free money, plus of course home prices that only ever go up -- fuelled by cheap mortgages.
> 
> That's what the public (voters) want, unfortunately.


If they yoyo we are in for a world of pain. Supply constraints and vulnerabilities are not going away with higher rates. Just less stressed due to lower volume. Employment will stay relatively strong due to constraints in quantity and quality which will force gov't to eventually focus fiscal policy on the supply side. Demand management can only do so much. And the zero rate solution obviously didn't work.


----------



## AltaRed

It is not nearly as incestuous as posts #789 and #790 suggest but there is give and take. Central banks do pursue monetary policy that is at odds with the government and have to be seen to do so to retain confidence in the currency.


----------



## sags

The same posters were complaining that Trudeau said he didn’t concern himself with BOC monetary policy and now they say he has too much control over it.

We don’t want a PM like Trump yelling at the Fed to lower interest rates to make him look good.


----------



## Covariance

TDB8150 now 3.80% and USD equiv is 3.70%


----------



## james4beach

Covariance said:


> TDB8150 now 3.80% and USD equiv is 3.70%


Wow this is great! And I was just about to say that the CAD one wasn't competitive enough given where t-bill rates are.

Nice. Those are both competitive rates. I might even have to move some money over from my credit union to get 55 basis points more in TD.


----------



## janus10

For retirees living off fixed-income the hike in rates used to be touted as helpful for them. And it would except right now it's coupled with higher inflation. 
My dad lives in subsidized assisted living so he might be sheltered from the ravages of inflation because his costs are fixed as a percentage of his income and spends almost nothing on himself. He can't find one thing to suggest for a Christmas gift. Not even socks!


----------



## Gator13

I bought BMT104, BMT109 and BMT114 (all $C) through one of my Investorline accounts. Currently at 3.90%


----------



## Retired Peasant

janus10 said:


> My dad lives in subsidized assisted living so he might be sheltered from the ravages of inflation because his costs are fixed as a percentage of his income and spends almost nothing on himself. He can't find one thing to suggest for a Christmas gift. Not even socks!


I think the best gift for someone in that situation is time - just go spend time with them.


----------



## sags

As interest rates return to normal levels there are both winners and losers.


__ https://twitter.com/i/web/status/1583584429725057024


----------



## janus10

Retired Peasant said:


> I think the best gift for someone in that situation is time - just go spend time with them.


I do as much as I can. But it's a 5 hour flight so I tend to try 3 to 4 times a year. Always his birthday for sure


----------



## sags

Higher interest rates are causing more pain in the economy than good. The central banks should have let inflation run it's course.


----------



## james4beach

sags said:


> Higher interest rates are causing more pain in the economy than good. The central banks should have let inflation run it's course.


sags if they don't fight inflation, then it "takes root" because people become used to it. Then, everyone starts expecting high inflation and baking it into all their calculations. That's a behavioural effect and once it starts, inflation tends to really get out of control.

One reason it's a great idea for them to fight it (with aggressive rate hikes and policy) is that long term inflation expectations, which are a market measurement (break-even rates) still show pretty low inflation expected in the long term. *That means that people have not yet lost hope in a return to low inflation rates.*

Current break-even rates show that the Fed and BoC still have a good chance of extinguishing high inflation.

It's better for the central banks to hit everyone over the head with a stick right now. If they don't, then those long term inflation expectations will start to rise and it's REALLY hard to regain normalcy after that.

That's what happened in the 70s and 80s. They didn't fight the early signs of inflation aggressively enough. It became entrenched, inflation went wild, and then they had to absolutely wreck everyone with sky high interest rates.

So take your pick. Either moderately strong policy today (like 5% to 6% interest rates) -- OR -- go lenient for now and run the risk of inflation becoming entrenched at say 10% or higher. Then the central banks are forced to jack interest rates up to 15% or 20% in coming years.

Which sounds better to you?


----------



## sags

It isn't working. Interest rates are up but prices in the main drivers of inflation are still rising........rent and food.

We may end up with the worst situation possible.......high interest rates, persistently high inflation, and a recession causing job loss.

The more the BOC tinkers.......the worse it gets.


----------



## sags

I believe that inflation was non existent previous to the covid shutdowns because supply and demand were in balance. Inflation started to noticeably rise in March 2022 when the economy reopened and pent up demand spilled into the marketplace, but the supply chain was still tangled up and in some ways still is.

The supply chain hasn't untangled fast enough, but it will one day and inflated prices will go back down. Supply and demand will keep prices in balance.

Meanwhile high interest rates are destroying entire sectors in the economy that may take decades to recover.


----------



## KaeJS

sags said:


> Higher interest rates are causing more pain in the economy than good. The central banks should have let inflation run it's course.


It's temporary.


----------



## londoncalling

@sages

If they navigate properly, interest rates will be transitory (unlike the previously predicted inflation). The market and the economy were overheated and needs to cool off. Use your COLA to buy the dip or some GICs. 

I expect sideways markets for quite some time while we sop up all the excess money that was created in the past couple years around the world. Best one can hope for is a short shallow recession. Without the pain consumers will keep spending.


----------



## Covariance

Bank of Japan surprised news (but not all macro investors) by finally increasing rates. The high level take away is another Central Bank joins the hawk group (flock?)

For the noobies still running carry trades this is a very bad day. There may be some instability in the next couple of days on margin related selling.


----------



## MrMatt

james4beach said:


> sags if they don't fight inflation, then it "takes root" because people become used to it. Then, everyone starts expecting high inflation and baking it into all their calculations. That's a behavioural effect and once it starts, inflation tends to really get out of control.


That's an interesting theory I basically don't necessarily agree with.

I think they fight inflation because things are just better if they're stable.

The extremes of hyperinflation are a bit more complex than everyone expecting high inflation, though I see how a run on limited resources could make this work. Reference the great toilet paper scandal of early COVID. Thing is those types of activities really can't run that long before we all run out of money.


----------



## MrMatt

londoncalling said:


> I expect sideways markets for quite some time while we sop up all the excess money that was created in the past couple years around the world. Best one can hope for is a short shallow recession. Without the pain consumers will keep spending.


I'm happy with boring sideways markets, I think they're generally healthier all round.


----------



## damian13ster

MrMatt said:


> That's an interesting theory I basically don't necessarily agree with.
> 
> I think they fight inflation because things are just better if they're stable.
> 
> The extremes of hyperinflation are a bit more complex than everyone expecting high inflation, though I see how a run on limited resources could make this work. Reference the great toilet paper scandal of early COVID. Thing is those types of activities really can't run that long before we all run out of money.


Run out of money? That's when you go to your employer for a raise and the spiral begins. Inflation expectations = higher salary demand and higher spending since saving is not a logical choice


----------



## MrMatt

damian13ster said:


> Run out of money? That's when you go to your employer for a raise and the spiral begins. Inflation expectations = higher salary demand and higher spending since saving is not a logical choice


If the employers can afford to pay more, then it's not that problematic.

The problem is when the employers can't afford to pay you more that it is dangerous.


----------



## OneSeat

Mourning Mail

"...............................Please note that *effective Wednesday, December 28*, we will be decreasing the interest rate for Oaken long-term GICs as noted below:

*Long-term GICs:*


3 Years GIC – 4.85% (currently 5.10%)
4 Years GIC – 4.65% (currently 4.95%)
5 Years GIC – 4.50% (currently 5.00%)............................"


----------



## gardner

I got that too. I wonder why the rate inversion in 3, 4, 5 years -- possibly positioning for eventual decline in rates?

I have an Oaken GIC coming up in January that I wish was in October. I was considering a 270 day short term one and then 4 years to get it in line with the rest of my ladder. The rate inversion on 4/5 years may make that a viable plan.


----------



## AltaRed

Market sentiment is for decreasing inflation a few years out (they want to believe central bankers saying we will be back to close to ~2% inflation by year end 2024), and borrowers are not going to lock in 'high' borrowing rates for 3-5 years. I'd advise against someone renewing a fixed term mortgage going more than 2 years, maybe 3 at the outside, at this point. Even if inflation is still 3% at the end of 2024, there is no point being stuck in a 5.5% mortgage in 2025. FIs are not wanting to be caught with expensive borrowing come 2025, so expect 3-5 year GIC rates to continue to decline slowly over the next 12-24 months.


----------



## OptsyEagle

I would advise the mortgager to make sure, as much as they possibly can, that no one takes away their house, and consequently throws their family out onto the street. So depending on their situation like job stability, income stability, years left on the mortgage and equity built up so far, my advise would be to pick the term that meets that most important goal.

With that in mind, knowing how many people recently overextended the amount of hose they just bought and may be or soon will be underwater on their equity, the 5 year term would be the hands down pick until they can get ahead of this game to some degree.


----------



## AltaRed

Fair enough. My view may be biased in that I don't know anyone directly, or indirectly, who is remotely near being underwater, never mind being over 80% LTV even in the current environment.


----------



## Covariance

Do they always pre announce?


----------



## james4beach

gardner said:


> I got that too. I wonder why the rate inversion in 3, 4, 5 years -- possibly positioning for eventual decline in rates?


And that's showing up across all GIC issuers.

This is pretty rare. I've seen yield curve (bond curve) inversions before but I don't recall seeing GIC rates invert to this degree. In the past, even with an inverted yield curve, I always bought the 5 year GIC because it always had the highest rate, or was very close to the 3yr, 4yr.

This situation today is pretty interesting. The bond market has priced the 2 year bond at 3.75% meaning that the bond market expects the BoC to *cut* rates over the next 24 months. Meanwhile the BoC (and Fed) stand at 4.25% and promise to keep tight policy. Even the BoJ, the most spineless central bank in the world, just tightened their policy. Additionally, QT continues and global central banks are all tightening.

So there's a massive disagreement between the bond market (which thinks rate CUTS are coming) and what central bank officials are saying:

If you believe the bond market, then Fed & BoC rate hikes are pretty much done and you might as well load up on bonds at 4% and GICs at 4.8%


----------



## AltaRed

I think you have that wrong. The bond market thinks inflation will be easing. Corresponding rate cuts would be a result (consequence) of inflation easing, not the other way around.


----------



## KaeJS

james4beach said:


> If you believe the bond market, then Fed & BoC rate hikes are pretty much done and you might as well load up on bonds at 4% and GICs at 4.8%


That's what I'm doing =)

Too much leverage was handed out. The rates will be cut. Inflation is going to die a lot faster than some people think. When Christmas is over, so is inflation. Give it a few months.


----------



## james4beach

KaeJS said:


> Too much leverage was handed out. The rates will be cut. Inflation is going to die a lot faster than some people think. When Christmas is over, so is inflation. Give it a few months.


Wow you really think inflation is over? I hope you're right, but personally I don't think inflation is disappearing that fast.

In the 1970s/1980s, there were periods where inflation appeared to subside and become normal, before it accelerated again and reached new heights.


----------



## KaeJS

james4beach said:


> Wow you really think inflation is over? I hope you're right, but personally I don't think inflation is disappearing that fast.
> 
> In the 1970s/1980s, there were periods where inflation appeared to subside and become normal, before it accelerated again and reached new heights.


Yep. I do. I'm going balls deep on ZFL.

People won't be able to handle these rates. Rents, mortgages, food, gasoline, etc.

People will have no choice but to stop spending.


----------



## AltaRed

As Stephen Poloz said recently, the increased debt ratios of consumers, businesses and government (compared to the past) should drive inflation down sooner with less BoC intervention, i.e. a one percentage point change in prime rate has more impact/sensitivity than in prior tightenings.

OTOH, we have higher structural cost inputs coming into the economy including climate change adaptation and mitigation, disater expenses, electrification, and the re-wiring of globalization to have more robust supply lines rather than most efficient, etc. There are those saying base rate inflation of 2% may be a bridge too far even if central bankers opine/forecast that they'll have inflation knocked down to about 2% by the end of 2024.

The point is no one knows. They are all speculative guesses until it actually plays out.


----------



## damian13ster

The squeeze might be weaker than double-digit interest rates, but it will have to be longer. Deleveraging will take a long time since the debt levels are so insanely high. If they let go too early people will just pile up debt again after short pause


----------



## james4beach

AltaRed said:


> The point is no one knows. They are all speculative guesses until it actually plays out.


Yes, there are many ways this could play out.

I have a lot in fixed income, and I do have some long term bonds but to somewhat mitigate the risks, I am keeping my bond duration a bit lower than normal. Instead of the typical 10 year average term, I'm at 6 year average term.

In my RRSP, I've left XBB alone as the time horizon is long enough there that I'm OK with higher bond volatility.


----------



## Covariance

My base case is the one year treasury and T bills outperforms equity indexes for the next six months.

Treasury (long bond) market is boxer pacing between inflation dropping through softlanding, and inflation dropping due to recession. It's a question of which way it happens. Inflation, based on the historical record, can be expected to drop quickly if a recession manifests and thus that would be the bull case for long treasuries. Inflation dropping through soft landing is also bullish for long treasuries but the path is less clear. @KaeJS I am also long duration but through other securities.


----------



## james4beach

Wild guess here, but I think next year will be a negative stock return, or close to flat.


----------



## KaeJS

james4beach said:


> Wild guess here, but I think next year will be a negative stock return, or close to flat.


I'd be surprised if it wasn't negative.


----------



## Synergy

KaeJS said:


> I'd be surprised if it wasn't negative.


Great times for those that DRIP and are in the accumulation phase, etc. Possible opportunity to purchase some good names at a discount.


----------



## damian13ster

Having two negative years in a row is extremely rare. It certainly can if rates stay at 5%+, but there are positive signs.
P/E for Nasdaq is close to 20, earnings so far generally surprised a bit to the upside, China is rapidly reopening (within a month we should find out if they blink or not), Russia- Ukraine war is likely to be resolved and rebuilding begin.
Commodities are likely to go up, already began with iron.


----------



## KaeJS

damian13ster said:


> Having two negative years in a row is extremely rare. It certainly can if rates stay at 5%+, but there are positive signs.
> P/E for Nasdaq is close to 20, earnings so far generally surprised a bit to the upside, China is rapidly reopening (within a month we should find out if they blink or not), Russia- Ukraine war is likely to be resolved and rebuilding begin.
> Commodities are likely to go up, already began with iron.


You may be onto something here.


----------



## MrBlackhill

damian13ster said:


> Having two negative years in a row is extremely rare.


Calendar years, maybe, but it did happen in the 70s and 2000s. But otherwise we're still above average on pretty much every rolling returns for 3+ years rolls. There's definitely still lots of space to go down back to average and below.






Allocation - Lazy Portfolio ETF


A deeper analysis about the rolling returns of the US Stocks Portfolio. Which is the statistical and historical return of a 3 / 5 / 10 years investment?




www.lazyportfolioetf.com





Also, yield curve has been inverted for a while now. If history repeats itself as it did over the past 7 recessions, we don't have much time left before a market crash. It should happen within the next 12-24 months.

Lastly, if this correlation continues to hold as it did over 60 years, then we're still at very low expected return. People are still holding stocks, but they'll dump them soon enough. We're still at levels seen only at the end of the 90s. Let's recall how the early 2000s unfolded.






Stock Asset Allocation vs SPX 10-Year Return







financial-charts.effingapp.com





And Shiller PE is still pretty high.






Shiller PE Ratio


Shiller PE Ratio chart, historic, and current data. Current Shiller PE Ratio is 28.13, a change of +0.16 from previous market close.



www.multpl.com


----------



## james4beach

MrBlackhill said:


> Calendar years, maybe, but it did happen in the 70s and 2000s. But otherwise we're still above average on pretty much every rolling returns for 3+ years rolls. There's definitely still lots of space to go down back to average and below.


I agree. To me, this doesn't feel like stocks have gone down much at all (yet)

XAW has a 3 year annualized return of 5.2% and 5 year annualized return of 6.4%

Those are pretty normal returns. Maybe we're past the worst of it already, which would be nice, but I think that true bear markets usually cause significant pain to stock holders. This hasn't happened yet, not even in tech stocks where *QQQ has a trailing 5 year return of 11.9%*


----------



## janus10

I saw recently that the US 2-10 year yield was at or close to an historic spread. How can one take a position on that (I.e. expecting it to narrow)? Are there futures traded for that spread or perhaps create one synthetically?


----------



## Freedom2022

james4beach said:


> Wow you really think inflation is over? I hope you're right, but personally I don't think inflation is disappearing that fast.
> 
> In the 1970s/1980s, there were periods where inflation appeared to subside and become normal, before it accelerated again and reached new heights.


We notice 5 years GIC and medium term bonds yield lower now.
Looks like the market think inflation will be contained soon.

I agree with james4beach. And I worry history will repeat itself.


----------



## Covariance

janus10 said:


> I saw recently that the US 2-10 year yield was at or close to an historic spread. How can one take a position on that (I.e. expecting it to narrow)? Are there futures traded for that spread or perhaps create one synthetically?


Yes to both. Check CME if I recall correctly.


----------



## james4beach

Freedom2022 said:


> We notice 5 years GIC and medium term bonds yield lower now.
> Looks like the market think inflation will be contained soon.
> 
> I agree with james4beach. And I worry history will repeat itself.


I could be wrong of course, this stuff is impossible to predict.

If someone strongly believes that inflation is now over, then you should hurry and -- before they change this -- buy a 5 year GIC from Outlook Financial at 5.0%

Their 5 year rates are still high. So if you think inflation is going to return to normal very soon, those 5% GICs will give you an amazing _3% real return_ for many years to come.


----------



## KaeJS

james4beach said:


> I could be wrong of course, this stuff is impossible to predict.
> 
> If someone strongly believes that inflation is now over, then you should hurry and -- before they change this -- buy a 5 year GIC from Outlook Financial at 5.0%
> 
> Their 5 year rates are still high. So if you think inflation is going to return to normal very soon, those 5% GICs will give you an amazing _3% real return_ for many years to come.


You're doing it wrong.

Why would anyone buy a 5 year GIC and be stuck at 5% when you can buy long term bonds and collect 3.75% and get probably 10%+ on cap gains?

I don't get the GIC mantra unless you're 70 years old.


----------



## OneSeat

KaeJS said:


> I don't get the GIC mantra unless you're 70 years old.


How about 85?


----------



## cainvest

KaeJS said:


> Why would anyone buy a 5 year GIC and be stuck at 5% when you can buy long term bonds and collect 3.75% and get probably 10%+ on cap gains?


It's the "probably" that some shy away from vs the "for sure" for a GIC.


----------



## james4beach

KaeJS said:


> Why would anyone buy a 5 year GIC and be stuck at 5% when you can buy long term bonds and collect 3.75% and get probably 10%+ on cap gains?


Well a couple things. First, the Canadian 30 year bond yield is only 3.1% which, even if you assume inflation is returning to normal, is only _slightly_ above the inflation rate. I'm not sure where you get 3.75% but perhaps long term provincial bonds do have higher yields.

The bigger problem though in my view is the potential downside on the long term bonds. Imagine that inflation really does persist, and we are going to live in a 4% inflation environment for many years to come. In that scenario long term bond yields would have to increase to something like 5%. You could be looking at a *50% decline* in the market value of these long term bonds, and that's a lot of downside.

Long term bonds fell a lot in 2022 but what's interesting is that interest rates didn't really go up that much. This shows how _insanely volatile_ those long term bonds are! The long term interest rates hardly increased at all and TLT still fell nearly 40%. Now imagine what happens if interest rates actually go up in any meaningful way.

GICs don't have any price downside.


----------



## MrBlackhill

james4beach said:


> You could be looking at a *50% decline* in the market value of these long term bonds, and that's a lot of downside.


The current drawdown is already pretty scary, but I guess we should buy the dip?










But I don't like bonds simply because I don't know what to expect from them on the long run... Sometimes there's long stretches with no real return.















ETF - Lazy Portfolio ETF


iShares 20+ Year Treasury Bond (TLT): which are the historical returns and the worst drawdowns? Is it a good choice for your portfolio?




www.lazyportfolioetf.com


----------



## londoncalling

Some would argue that the return of bonds is less certain and do not actually provide stability in uncertain times. Until recently this was definitely not the case as bonds typically performed better when equities did poorly. The argument is that bond rates float up and down with interest rates but rarely do we see deflationary environments. So if costs are almost always going up but our bond yields are not then we are losing. The theory suggests If one is not needing the capital a more stable return can be found by holding a boring old dividend aristocrat that pays an increasing yield I am not sure if I agree with the thesis but did find the perspective fascinating and perhaps worthy of further study.


----------



## Covariance

If the realized return to the bond (or any asset for that matter) is less than inflation - over the same period - then its real return is negative. This much is always true. When we discuss future expectations for a real return we are making two forecasts - the nominal return from the asset class, security and a forecast of inflation over the same period. Personally I have little to no faith in inflation forecasts greater than 3 months. So I ignore all of this real return convo and focus on generating an absolute return (in nominal terms) subject to my risk constraints.


----------



## james4beach

I suspect that short-term interest rates (at say the 1 year and 5 year) are going up in the next few weeks.



Covariance said:


> Personally I have little to no faith in inflation forecasts greater than 3 months. So I ignore all of this real return convo and focus on generating an absolute return (in nominal terms) subject to my risk constraints.


I think that's a very sensible approach. We really have no idea what the real return WAS until it's already long past.


----------



## james4beach

MrBlackhill said:


> The current drawdown is already pretty scary, but I guess we should buy the dip?


I don't specifically invest in long term bonds, but I just "bought the dip" in broad / aggregate Canadian bonds today (which holds both short & long term).

These funds like XBB and VAB have a yield-to-maturity of ~ 4.2% which is still quite competitive.


----------



## pearl

Does anyone know the equivalent of TDB8150 on BMO investor line? July realized I have some cash sitting there for a year earning nothing. Thanks.


----------



## pearl

pearl said:


> Does anyone know the equivalent of TDB8150 on BMO investor line? July realized I have some cash sitting there for a year earning nothing. Thanks.


Never mind. I found BMT104 has rate of 4.1%.


----------



## Covariance

After the strong job report in Canada this morning we can expect Bank of C to continue to raise. Likely 25 at this point. We await CPI later this month before firming up our base case.


----------



## MrBlackhill

Interesting situation.

Labor force participation rate still at 25-year low.
Unemployment rate still at 50-year low.


----------



## Covariance

Employment is a trailing indicator of economic activity. We know the economy in general and employment specifically has been strong, and this report is consistent. We roll forward another month and await a break to the downside.


----------



## james4beach

Employment reports in both the US & Canada were strong, with the Canadian economic numbers looking spectacularly strong.

Meanwhile the latest reports of cash positions held in banks seems to suggest that people generally have a lot of cash cushion, which provides insulation against financial distress. With the strong employment and so much cash, people are in good shape.

I think the Fed and BoC will want to tighten financial conditions significantly more. General conditions are way too "loose" at the moment, especially when you consider the cheap lending rates due to very low bond yields at 5 years and beyond.


----------



## Covariance

deleted


----------



## londoncalling

james4beach said:


> Employment reports in both the US & Canada were strong, with the Canadian economic numbers looking spectacularly strong.
> 
> Meanwhile the latest reports of cash positions held in banks seems to suggest that people generally have a lot of cash cushion, which provides insulation against financial distress. With the strong employment and so much cash, people are in good shape.
> 
> I think the Fed and BoC will want to tighten financial conditions significantly more. General conditions are way too "loose" at the moment, especially when you consider the cheap lending rates due to very low bond yields at 5 years and beyond.


I am sure I am missing something with this thought and know that longer term rates are more focused on economic forecasting. To clarify that I mean that a central bank cut is expected in the medium term so longer term rates are not as high as many think they should be(premium spread). I have also been told lenders(retail banks) pay higher interest if there is more loan demand. Any truth to this? If so how much of a factor is it playing in the current rate offerings? I would guess very little. There is still a lot of money out there that needs to be absorbed.


----------



## zinfit

A definite yes. Rule number 1 for all stock investors should be "don't fight the Fed"


----------



## james4beach

zinfit said:


> A definite yes. Rule number 1 for all stock investors should be "don't fight the Fed"


I agree. For the life of me, I can't understand why everyone is trying to fight the Fed.

On another forum I read sometimes, some of the younger guys are even finding new loans right now to amp up their leverage. What a stupid idea. The Fed is pretty much directly telling you: "don't leverage up, we are tightening conditions."


----------



## damian13ster

Not sure if people are 'fighting the fed' anymore. The fed mentioned 5.25% as terminal rate.
S&P P/CF is 18.55


----------



## hfp75

I have read multiple reports that indicate the terminal rate of 5.1-5.4%, however terminal might not really be terminal, as there is talk of a 'pause'. This terminal rate we are discussing is more the 'hopeful terminal rate' as it is widely anticipated that inflation will react to it and begin a gradual descent. Ahh heaven. However there are still a lot of inflationary pressures and risks that are very real triggers. Plus lets not forget that we have been *encouraging inflation* since '08 !!! Our solution to everything is more money (QE). With a fiscal house that is in order we can withstand fiscal shock and fiscal demands. I would argue that our fiscal house is no longer in order & we teeter on the edge as we flirt with costly expectations and commitments that are not funded. The 'always' solution cannot just be, print more cash, ask Weimar Germany how that went - seriously read about it.

Scenario 1 - inflation starts falling as expected... and drops nicely to 2% - Oh so nice, Powell & Malcom are heroes and we are all comfortable.

Scenario 2 - inflation starts falling but is sticky at 3-4% and rates are required to stay high. Powell has all but been saying this. 'Rates will be high, longer than people are expecting.'

Scenario Modifiers... War, supply line disruptions, net income dropping due to unfunded taxes, ect, ect....

This WILL come back to haunt us, its just a matter of time. We need a hard u-turn with our planning.


Here is a picture of a girl heating her house burning money as its cheaper than wood.


----------



## Covariance

I would not classify supply disruptions as a modifier. It may well be the defining characteristic of inflation pressures in the years ahead. Traditional monetary policy has viewed interest rates up/down as influencing demand (down/up) to bring inflation down/rekindle economy. Doesn’t work if supply is really the issue.


----------



## OptsyEagle

Covariance said:


> I would not classify supply disruptions as a modifier. It may well be the defining characteristic of inflation pressures in the years ahead. Traditional monetary policy has viewed interest rates up/down as influencing demand (down/up) to bring inflation down/rekindle economy. Doesn’t work if supply is really the issue.


I would probably say raising interest rates do not work as well, as opposed to saying they will not work.

The other thing that may be interfering here, with using interest rates to reduce demand and therefore reduce inflation, is the larger abundance of lines of credit and credit cards, currently in existence, that may not have been available during the interest rate increases in times past. What I mean is, for a society that seems to see "available credit" in the same light as "available bank account balance", as interest rates go up and start to squeeze the household incomes, too many of those households will simply turn to credit to maintain their spending lifestyle, delaying their reduction in the demand equation.

As above, this phenomenon won't negate the effect of raising interest rates to combat inflation, but may very well delay the effect for quite a while longer OR require much higher interest rates to do the same job as might have been achieved in times past...where so much household credit was not available.


----------



## Covariance

To be clear. I was not implying that raising rates will not work here. My forecast if you will for the subsequent period is inflationary issues may be more supply shock driven And need different solutions than raising/lowering interest rates.


----------



## OptsyEagle

Covariance said:


> To be clear. I was not implying that raising rates will not work here. My forecast if you will for the subsequent period is inflationary issues may be more supply shock driven And need different solutions than raising/lowering interest rates.


Yes, I understood your point and it was a good one that I agree with. That said, even with a supply shock problem, if you raise interest rates high enough, the reduced demand it will cause can still bring the supply and demand equation into a reduced inflation level.

Most likely however, if this truly is a supply shock, the level of interest rates would have to be high enough to cause serious job losses (recession) to accomplish that goal, I would think.


----------



## hfp75

Well you can directly impact the Supply OR the Demand side to impact inflation.... There is no plan to increase more local or alternate supply ... so I do see the supply disruptions being problematic... this doesnt help us. Interest rates impact both the Supply and Demand side. I think the fed is trying to hit 5 heads at once with interest rates... have you ever played wack-a-mole.


----------



## OptsyEagle

Yes. But with the fed it is wack-a-mole game with just one ground hog head popping up. It is the size the bat that is varied by the Fed, as they rachet up interest rates higher and higher to smack down that one problem, inflation.


----------



## Covariance

Supply is best addressed by elected officials. Trade policy, industrial policy, man-power and training, housing.


----------



## Covariance

Record inversion? A chart I track; US 10Y-3month






10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity | FRED | St. Louis Fed


View the spread between 10-Year and 3-month Treasury Constant Maturities, which is used to predict recession probabilities.



fred.stlouisfed.org


----------



## james4beach

Here's an illustration of how the market (and Wall Street) continues to fight the Fed. The argument from Wall Street consensus is:

the market knows better ; the market predicts that inflation is over ; therefore the Fed is overly hawkish and must stop raising interest rates


----------



## AltaRed

We wouldn't expect anything different from CNBC and from any financier whose daily supper depends on market investment.


----------



## Covariance

Maybe the Fed will go 50 at the next meeting to slap them down. As of a moment ago 21% probability. (the other 79% thinks 25)


----------



## james4beach

This is another example Fed vs The Market. Here is one of the Fed members (they all do media interviews) and nearly all the interviews sound the same.

If you believe the Fed members, the weighted average Fed rate (and t-bill yield) for the next 2 years will be around 5.0%
Meanwhile the 2-year bond today yields 4.22%

So you have to wonder, why would someone accept 4.2% over two years when the Fed says cash will provide 5.0% ? That's a pretty big difference considering that a 2 year term should also have some term premium.


----------



## crgf1k

I think the fed appears overly hawkish to people because the fed is factoring in the value of the USD more than they're letting on. They've become more hawkish over the past couple of months since the DXY has dropped. Inflation dropping a bit isn't enough, because a weak dollar means more inflation. As long as other central banks around the world are raising rates, the fed will be trying to outdo them. The BOC seems to be in lockstep to protect our dollar.


----------



## MrMatt

I think the central banks are trying to look aggressive, and that they'll "do what it takes".
I think by now people understand they're serious about hiking rates, irrespective of the collateral damage.

However I just checked GIC rates on my TFSA, they peak at 18 &24 months, and 4 years is the same as 1year.
They clearly don't expect rates to stay high for too long.


----------



## Italicum

crgf1k said:


> I think the fed appears overly hawkish to people because the fed is factoring in the value of the USD more than they're letting on. They've become more hawkish over the past couple of months since the DXY has dropped. Inflation dropping a bit isn't enough, because a weak dollar means more inflation. As long as other central banks around the world are raising rates, the fed will be trying to outdo them. The BOC seems to be in lockstep to protect our dollar.



Perhaps but only relatively I would say. Powerful factors that determine/protect the value of the USD include:

How relatively insulated the domestic market/economy is. US trade of goods and services to gdp ratio for 2021 was only 23%. (Canada sat at 61% and Germany at an eye-popping ~90)
The pre-eminence of the US$ as the world reserve currency
The point you make, I suggest, is a lot more relevant for all other G7 economies and certainly true for Canada, given our exposure to external markets. So, I believe the BoC does need to be competitive/in lockstep with Federal Reserve Board's policy....the Feds not nearly as much as anyone else. They do portray themselves as hawkish but mostly to quench internal fires.


----------



## MrMatt

Italicum said:


> They do *portray *themselves as hawkish but mostly to quench internal fires.


I think that's the key point, they want to create an impression, and change behaviour, without actually having to carry through and raise rates.
For that to work, they have to keep the fear of higher rates "real".


----------



## Italicum

I am too lazy to open another thread (one might be there already) and I apologize in advance for 'polluting' this one but I would love the feds to follow the lead of European banks in their green economy promotion: "Powell’s position on the issue stands in contrast to major central banks in Europe that have integrated green economy efforts into their policy-making" U.S. Federal Reserve needs independence to fight inflation, should avoid climate policy: Powell - The Globe and Mail (paywall).

However, I fully understand Powell's position: "
“we should ‘stick to our knitting’ and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities,” Powell said. “Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence.”

The need for the U.S. central bank to manage inflation through interest rates and other policy is “well understood and broadly accepted,” Powell said, and embodied in a federal law that charges the Fed with maintaining maximum employment and stable prices"


----------



## Italicum

MrMatt said:


> I think that's the key point, they want to create an impression, and change behaviour, without actually having to carry through and raise rates.
> For that to work, they have to keep the fear of higher rates "real".


The famous Mario Draghi's "whatever it takes" is one of the best examples. Raising your credibility and instilling confidence in the markets and public by walking the talk is key. Once that credibility is in place, then you can deploy the "whatever it takes" preemptively.


----------



## MrMatt

Italicum said:


> The famous Mario Draghi's "whatever it takes" is one of the best examples.


If the big money believes the government will do "whatever it takes", they'll act with appropriate caution, and maybe the government won't actually have to take as drastic steps.

Remember, one of the big problems with market psychology is people saying "that will never happen". 
When people felt "real estate never goes down"... you know what happens.


----------



## james4beach

The market is calling "bull****" on the Fed, thinks interest rates are going right back to where they used to be. For example the 5 year treasury is at 3.66% which basically is pricing major interest rate cuts within the next couple years. By my estimate the 5 year bond yield is mispriced by more than 100 basis points.

Here is the mechanism the Fed uses to respond. This is very interesting and deliberate. These Fed members and retired Fed members go on speaking tours to communicate the message. It's important to listen to Richard Fisher (and others like Daly, Bostic). They are in the media for an important reason.

It's a not-so-thinly-veiled threat: "you had better listen to the Fed"


----------



## Covariance

@james4beach I do not disagree with the possibility of a higher realized forward rate than would be priced in here. But I am interested in how you are pricing the 5Y at 4.66?


----------



## james4beach

Covariance said:


> @james4beach I do not disagree with the possibility of a higher realized forward rate than would be priced in here. But I am interested in how you are pricing the 5Y at 4.66?


Just making some guesses and projections, I figured 2023-2025 are around 5% and then a gradual reduction of rates in 2026-2027. I annualize that and then add some term premium.

That's a work of fiction of course. Easier to make a projection for the 2Y treasury.

In general though, I think the biggest "disconnect" between the market and the Fed is the idea that rates will come back down very quickly. The Fed is saying they will keep rates high to extinguish inflation, whereas the market things the Fed will be cutting rates within 12 months.


----------



## sags

Irrational exuberance perhaps ?


----------



## Covariance

TD ISA ticked up again to 3.9% on USD


----------



## Covariance

james4beach said:


> Just making some guesses and projections, I figured 2023-2025 are around 5% and then a gradual reduction of rates in 2026-2027. I annualize that and then add some term premium.
> 
> That's a work of fiction of course. Easier to make a projection for the 2Y treasury.
> 
> In general though, I think the biggest "disconnect" between the market and the Fed is the idea that rates will come back down very quickly. The Fed is saying they will keep rates high to extinguish inflation, whereas the market things the Fed will be cutting rates within 12 months.


5% for three years would be something to see. The Fed themselves believe they will be more successful. Then again they acknowledge the inaccuracy of forecasts post COVID. Time will tell.


----------

