Down she goes

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News you can use (as opposed to what you hear on Global):

Mortgages dip.
No, it is not because of the recent and knuckleheaded move by the Bank of Canada to nip its trendsetting rate by a quarter point. Instead, RBC is easing fixed-term rates a little to reflect lower yields in the bond market. So you can now get a five-year fixed for 2.84%, down one-tenth of a point – the same price brokers have been offering it for months.

The bank’s posted rate doesn’t move. More importantly, the prime doesn’t budge, either. So variable-rate mortgages – usually the beneficiary of a central bank cut – remain the same. And remember that even if banks relent and dip VRMs, monthly payments will not be reduced. Meanwhile, though, the amount of interest banks are paying on deposits has decreased. More proof saving is so yesterday and investing is so now. In the eternal words of Meatloaf, good girls go to Heaven. Bad girls go everywhere.

Overweight in the USA
Long ago I made the point your portfolio should contain a minority of Canadian growth assets. So, for every dollar in a Canadian equity ETF, you should have two in American and international securities. Looks like we have only started to feel the effects of the oil slide, with job losses, more consumer inflation, a lower dollar and big government deficits in the months ahead. Add to that a horny populace that thinks $800,000 bug-infused semis are worthy of epic debt.

Meanwhile, have you been following the US economy? The federal deficit was 9.8% of the economy in 2009. It’s on track now to be 2.6% – the fifth consecutive year of decline – as tax revenues shoot higher along with consumer spending, thanks in part to cheap gas. The jobless rate is expected to be 5.5% in 2015, about half the level of six years ago. The US economy has been growing by 5%, and the Fed will raise its key interest rate in a few months for the first time since the GFC.

Look at the US home ownership chart below. Could the contrast be any starker?

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Cowtown Death Watch
Yes, I know this irritates the hell out of realtors there, lots of whom have been coming here lately to have a dump on this pathetic blog. But that’s okay. How can you really be angry at anyone who believes what they read in the Calgary Herald? We all have a responsibility to care for them. Like retired geldings.

Well, this week opens with a 38.3% drop in house sales compared to the same time last year – from just over a thousand to 640. The big story, however, is listings. At almost 4,500, there are 79.2% more of them than last January. New listings have jumped almost 40%, perfectly in negative correlation with the price of oil. I hear listings have bloated in Saskatoon, as well. Edmonton next. Fort Mac is already done. Interestingly enough, this could be just the start.

Finally, a smart economist.
Because he agrees with me, of course. Doug Porter is the chief egghead at BMO and he supports the notion that the Bank of Canada was a total dipstick in dropping its rate and stirring the loins of all those moist Millennials now begging to borrow money. How, he wonders (me, too) can this possibly be good for a country with a condo economy and citizens already pickled in debt?

“Far from helping growth, the rate move could actually increase consumer and employer anxiety and uncertainty,” Porter writes. “More fundamentally, the economy’s shape is arguably already heavily skewed by the persistence of negative real interest rates, and the cut threatens to make the skew grotesque.” (Negative rates happen when the cost of a loan is less than inflation.)

Porter says the central bank’s move is not the ‘insurance’ that boss Stephen Poloz claimed, and will “do nothing” to help the economy.

Is there more to come?
Porter may be disgusted, but he thinks the Bank of Canada may cut its rate again in the Spring. Capital Economics economist David Madani agrees. In fact, now that the BoC has turned poodle some people think it could take its benchmark rate, currently at .75%, down to .25% by the end of the year – even as the Fed raises the cost of US money.

Well, imagine what that’ll do to the loonie. Could there be a clearer admission the Canadian economy is pooched?

I hear daily MLS sales in Toronto and Van are up. Poor sheeple.

Sheeple

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When I was in Ottawa the last time as an MP, sitting in the government lounge behind the green curtains to the right of the Honourable Speaker’s chair in the House of Commons, I first heard the expression.

“Wonder what the sheeple are thinking?” Seems to me it was John Baird who uttered the words. I don’t recall the issue of the day, but I was struck by the word. Sheeple. He meant citizens. Voters. The manipulated.

I thought of that on the weekend when I read a comment posted on this pathetic bog by an insurance guy from Ontario. “People here are so mistaken if they believe house prices will soon fall,” he wrote, “especially now that mortgage interest rates will be dropping soon.”

This is exactly what the feds (including Mr. Baird) and the Bank of Canada want the sheeple to believe. And a lot have already fallen for it, with a torrent of calls last week to real estate agents in Toronto and Vancouver. On CBC’s suppertime TV show Saturday night a woman with babe in arms said to a reporter: “It’s great they’re putting the interest rates down because we just bought a new house last month and we’re going to sell ours next week.”

Since the wheels came off the economy in 2008, this has been the government’s primary strategy – make money so cheap it’s irresistible. Then tell people things are getting better. The sheeple will respond. They will borrow to excess and spend beyond their means. So the economy will get better.

Only it didn’t. So, the manipulators have done it again, now that the oil price shock guarantees incomes in Canada will be softening, along with our overall fortunes. If the herd was that gullible the first time, they’re saying in the government lounge, it’s a sure thing it’ll happen again.

Of course, it’s not 2008 anymore. Seven years later we have houses that are far more unaffordable, an epic new level of personal and household debt, less economic growth and now the prospect of collapse in our key export industry. So it’s simply astounding what one quarter-point nip in the Bank of Canada rate can do – especially when (so far) it means not a single mortgage or line of credit payment is cheaper than it was two weeks ago.

Let’s talk about oil and real estate. And deflation. As I’ve been yammering on about for well over a year here, this is the beast you should most fear, not the absurd idea you’ll be priced out of the real estate market forever. If what’s happening in Alberta and elsewhere is an indication, real estate could end up being the black swan few expected to swoop in.

As this week begins, year/year sales are down 33% in Calgary and listings are up 79%. Last year at this time there were 2,400 properties for sale, and now there are 4,400. That may not be a big deal historically, but the rapidity of this buildup has been breathtaking. It correlates perfectly with the job losses and employment insecurity now sweeping the region. But this is not just a Calgary story, since this misery is expected to crash economic growth in all of Canada in 2015, send governments spiraling into deficit and has already nuked the dollar, sending the cost of a new Harley up 20%. The agony.

Here’s what Cowtown permabull realtor Mike Fotiou writes on his blog: “At this pace, month-end inventory will cross north of the 5,000 mark, making it the 3rd highest January level since 2006.    High inventory, low sales: too early to expect the benchmark price to be affected significantly this month but if this market imbalance persists, we’ll see price deflation.”

Of course we will. And things, says a TD economist, are destined to get worse.

According to Dina Ignjatovic, oil (now at $45), will drop to around forty bucks on average for the first half of 2015, then achieve only $53 by the final months of the year. This is low enough to roundly spank the oil sands industry, as demand for crude stays tepid while supplies pile up. (US oil inventories are at an 80-year peak.)

Officially, Calgary realtors are not ceding to reality. “People outside of our province have a much different perspective than Calgarians do. They think the sky is falling,” the president-elect of the Calgary Real Estate Board told the Toronto Star. “Don’t get me wrong, there is a lot of concern here. But people in Alberta have seen this movie before. I think they are a bit more level-headed in reacting to this.”

Well, the thousands of families rushing to the exits right now suggest otherwise. But we’ll see. Perhaps like the gullible in Ontario, Albertans will believe a small rate drop (that does not benefit them) will compensate for paying too much for housing while taking on massive debt, in a world bordering on deflationary contraction.

If so, the dudes behind the Commons curtains are geniuses.

Fleeced again.