Does Stephen Poloz know what he’s doing? The Bank of Canada head dude shocked markets last month when he dropped the bank’s key rate a quarter point. “Insurance,” he called it. “Poison” is more like it.
The signal he sent was unmistakeable. The guy had the patina of desperation about him. Immediately the dollar plunged, and has been barely above 80 cents US since. When it happened, I told you there’d be consequences.
The nation imports $45 billion worth of stuff every month, mostly machinery and equipment, motor vehicles and parts, electronics, chemicals, electricity and durable consumer goods. Yes, plus food. And Harleys. The bulk of this comes from the US, and we’re paying 20% more than we used to.
So thank Allah for cheap oil. Without a big drop in gas and energy costs, consumers would be shanked. As it is, families are still squeezed. Thanks to Poloz, it’s just started. I mean, have you bought lettuce lately?
Despite a massive 12% drop in energy prices in January, inflation was up 1%. Core inflation (after volatile energy is stripped out) is double that, at 2.2%. That number hasn’t changed in a long time, and sits within the central bank’s own target range. It would be lower, and living would be cheaper, if our central bankers had not sacrificed the dollar. As a consequence, seven of the eight categories of stuff StatsCan tracks cost more last month. Food alone was up 4.6%. Clothing shot ahead as well, along with all the crap from China that Wal-Mart sells.
Meanwhile, if you live in the GTA or YVR, you know what that quarter point cut did to housing. As predicted, it stirred the loins of moist Millennials, sending them into the streets to start bidding wars and force prices higher – even though mortgage rates were basically unchanged. Just as Poloz had telegraphed fear to the currency markets, he fed expectations that cheaper money would mean pricier houses. And so, it came to be.
In the first two weeks of February, say the realtors, sales in Toronto jumped 14% year/year, while prices were up 10.3%. The average detached house sprinted ahead to $1,056,238, the highest in almost a year, after trending lower through the second half of 2014. A similar story happened in Vancouver. Recall the photo I showed you the other day of a near-riot to buy 300-foot micro-boxes in unbuilt suburban towers.
So that’s Polozonomics. A rate cut. Collapse of the dollar. More expensive imports. Sustained inflation. Higher living costs. Real estate speculation. More consumer debt. All at the same time our export base is falling and jobs erasing, thanks to oil. What a combination.
How would it have been worse to leave interest rates alone, let the dollar down gradually, curtail inflation and suck some air out of the housing gasbag, giving hope to those priced out?
Clearly the bank was spooked about oil and deflation, plus what’s been happening in the prime minister’s home province. As you know, Alberta real estate is cratering. January sales crashed 45% in Llyodminster, 41% in Fort Mac, 35% in Calgary and 23% in Edmonton. This month to date, Calgary deals are down 34% and average prices have dipped 4%, with the expectation the decline will deepen significantly in the coming months. Once again we see human nature at play – when listings bloat, sellers sweat and values decline, the buyers disappear. When real estate is topping out and irrational, as in YVR, there are lineups to make offers. Nothing ever changes.
What happens now?
The betting is Poloz panics and reverses course. He already signaled that in a speech this week, saying the January cut was enough. Now he can see the immediate impact of his loonie-crushing move. With inflation rekindled even as a sagging economy punishes citizens, it’s highly unlikely another cut is in the cards – at least not next Wednesday, when the next rate announcement is scheduled.
Meanwhile we all know the US Fed will be raising its rate – likely June 17th, or July 29th. If that happens on the heels of another Bank of Canada rate reduction, just imagine where our currency is headed.
Well, now, aren’t you happy you took my advice years ago to put together a balanced portfolio with lots of diversification? More US, less Canada. A whack of fixed income and REITs. Bank preferreds. Inflation-indexed bonds. No stocks, no mutuals. Lots of love and a secret sauce.
Given what’s coming, you’ll be happier still.