Entries from March 2016 ↓

Never say never

HUG modified

A bogus report on Chinese house-buying in Vancouver. A sleazy fear-mongering campaign to scare people away from their banks. What else can we put on the menu for an Easter weekend? After all, this is a full-service blog. If you go a week without being offended, we’re not trying hard enough.

So let’s address a canard that deserves to be squished.

Here’s Nathan, with a good and timely question:

“It seems a lot of people have similar questions to mine after reading your blog.  Is it even possible for interest rates to go up much in the next ten years? It would seem that every country (and person) in the world has an addiction to debt and a couple of point swing in interest would probably break many countries ability to pay?  Kyle Bass has said it is impossible for interest rates to go up significantly in our lifetime due to this very issue, don’t you think the number of countries/individuals this would impact would prevent central banks from raising interest rates to a normal level?”

BASS modified  First, Nate, Kyle Bass wants to scare you, because he sells financial products that frightened people buy. Plus he’s a gold nut. Mostly you should ignore him because he’s wrong.

The US raised rates for the first time in a decade in December. You should expect two more during 2016, with the next increase coming as soon as next month. The Fed’s pretty cagey and unpredictable, so we have no real idea when the trigger will be pulled, but the rate will likely be a half point higher by the end of the year. And another 1% above that by the end of next year.

This is because the American economy is doing fine and policymakers wish to steadily reduce the amount of stimulus government injects, in order for more sustainable long-term growth. Plus they worry about debt, and the bubbles that cheap money cause. This is why they ended the monthly bond-buying in 2014 (which Bass and the geniuses here said would never happen) and why we got the increase in December (which Bass and the doomers on this blog swore was impossible).

Normalizing the cost of money is good monetary policy, and every central bank in the world is jealous of the Fed these days. They all want their economies off the junk food of cheap rates. And it’ll happen. Once commodity values creep back you will see a corner turned. Don’t be on the wrong side.

As for Canada, over 90% of the time the bond market here follows that to the south. In fact 93% of the time the Bank of Canada ends up aping the Fed in its monetary policy. So I think you’ll see a higher rate here within the next 12 months. So get ready now. For example, preferred shares – whacked last year by two Bank of Canada cuts – could have a glorious future ahead.

Meanwhile we have this T2 thing going. The deficit, as you know Nathan, was extreme – three times what we were promised in an election just a hundred-odd days ago. In fact, deficits will be the norm for every single year of the Trudeau admin, adding at least $100 billion over the next four years. If he’s elected again, he will certainly trounce the Harper record of $170 billion in new debt over eight years – and he won’t even have a recession to blame. Atta boy, Justin.

Deficits are a form of economic stimulus, since the government will print and borrow more money than it raises from taxes, in order to dramatically increase spending. Deficits today represent additional future taxes, but Boomers don’t care about that because it’s the Millennials who will pick up the tab. BTW, did you hear that Premier Notley now says Alberta has completely abandoned a balanced budget? More deficits as far as the eye can see on a prairie morn.

Anyway, Nathan, we were talking about interest rates. And now that the federal government has assumed the role of stimulator, at the same time the Americans are raising the cost of money, the odds of the next Bank of Canada move being up (not down) have jumped. Our central bankers, like those in Washington, dearly want to restrict credit, end the growth in household debt and prick the bubble housing market before it erupts on its own. They’d like higher rates to support the Canadian dollar, keeping it in a less volatile trading range, to temper the consumer inflation that comes with a limp currency and tackle the destructive meme (which you and Bass espouse) that rates can never go up.

That breeds irresponsible borrowing, and gives us $1.8 million detached houses in Vancouver.

So, use cheap money now to accelerate debt repayment. Don’t binge borrow to buy assets that low rates have inflated. Never believe it’s different this time. And be so careful about what you read.

Merchants of fear


Pssst. Did ya hear the government’s trying to sneak in a secret law so that when the banks fail they can then take your money, use it to rescue the execs, then turn it into useless stock? This is no joke. It’s true. It’s shocking. It’s called ‘bail-in’. Tell everyone. If they look stunned and incredulous, show them last week’s budget. It’s right there on page 223. Read it.

If you’re outraged that Justin Trudeau would try to do this, join the movement. It sure smells like another left-wing conspiracy to undermine personal savings and investments, targeting Boomers and the wealthy. Confiscation of private wealth is, of course, the ultimate and thinly-veiled goal of the socialists who masquerade among us as reasonable politicians. They are not. This is the think edge of the commie wedge.

Doubt me for a second? Then watch this. Thank Allah for strong conservative voices, like those of brother Ezra Levant…

Yes, it’s the latest piece of tinfoil that conspiracy nutjobs are busy wrapping themselves in. Listen to some of the ‘informed’ commentary about the budget ‘s bank bail-in provisions currently slithering around the Internet:

From Zerohedge: “We have official confirmation that Canada has just become the latest country to treat depositors as the bank creditors they are, and as such, they too will be impaired, or “bailed-in” the next time a Canadian bank needs to be rescued… This new “bail-in” regime is spun as benefiting taxpayers; what isn’t mentioned is that most of those taxpayers who will be “protected” also happen to be the impaired depositors (also known as creditors) in these soon to be bailed-in banks, which begs the question: just who or what is being protected here?”

From TheRebel.media: “That means that if a bank starts to go wobbly in Canada, and you have money in that bank, the bank can take your money to bail itself out. When you have your life savings, or your kids college fund, or even last week’s paycheque in the bank that you need to pay your rent, you are technically a creditor of the bank. As in, they owe you that money. But this Liberal proposal says that if the bank has trouble, they can just take your cash, and give you shares in the worthless bank instead.

“Trudeau says he’s going to change the rules. So that if a Canadian bank, perhaps the most regulated industry in Canada, gets in trouble, ordinary Canadians will be forced by the government to bail out the banks. They’ll just take your money.

“This is outrageous. The people of Cyprus may have put up with it — they were fleeced by their own government, but also by the European Union. No warning. But what’s our excuse? You have your warning now. Page 223 of the budget. If you don’t speak out against this now, don’t say you weren’t warned. If you agree that this has to be stopped, click below and sign the petition!”

Unbelievable. If this spreads across the blogosphere and mainstream media the way the Chinese-own-a-third-of-all-Van-houses story did, we’re all screwed. It means we get the society we deserve, in which public opinion is teased, twisted and tormented by those with an egocentric and destructive agenda.

So, here are the facts.

First, the ‘bail-in’ stuff is not a Liberal idea. It came from the Conservatives, was included in Jim Flaherty’s 2013 budget and roundly debated on this very blog. Here is what the dearly-departed elfin deity F said three years ago.

“The Government proposes to implement a ‘bail-in’ regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are too big to fail.”

Here’s what the Trudeau budget said last week:

“To protect Canadian taxpayers in the unlikely event of a large bank failure, the Government is proposing to implement a bail-in regime that would reinforce that bank shareholders and creditors are responsible for the bank’s risks—not taxpayers. This would allow authorities to convert eligible long-term debt of a failing systemically important bank into common shares to recapitalize the bank and allow it to remain open and operating. Such a measure is in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as “too-big-to-fail”.

Notice any similarities? Of course you do. It’s exactly the same government intention, framed in nearly-identical language. There’s nothing ‘Liberal’ about this. The Trudeau gang just copied it from the Cons – something a lifelong conservative warrior like Ezra Levant, or the much-worshiped but usually-insane Zerohedge dudes would know.

Now here’s the second question: would a bail-in regime take your money? Are depositors, with GICs, savings accounts or bank mutual funds really ‘creditors’ liable to be fleeced if a bank toppled?

Of course not. Below are the actual proposals, detailed in a Department of Finance paper on the initiative (called the ‘Taxpayer Protection and Bank Recapitalization Regime’), which was launched by Joe Oliver (the last Conservative finance minister we had):

  • The creation of new long-term senior bank debt – so-called ‘bail-in bonds’ which investors would snap up (since they pay a premium for slightly enhanced risk)
  • Conversion of those bonds into bank equity under certain strict conditions when bank capital requirements were not met
  • Cancellation of some or all pre-existing bank shares in the event of a bail-in occurrence
  • Deposits would be excluded from the bail-in regime.
  • Systemically-important banks would be subject to higher ‘loss absorbency’ requirements, based on risk assessments.

Naturally, there’ll be no bail-in. The country’s Big Six banks are indefatigable money machines, churning out ever-higher profits and constantly trimming risk. Said the Conservatives the last time this moronic criticism was raised: “The bail-in scenario described in the (Flaherty) budget has nothing to do with depositors’ accounts and they will in no way be used here. If a bank is having severe difficulties, the bail-in regime would force certain debt instruments to be converted into equity to recapitalize the bank.”

Well, it’s sad this pathetic blog needs to devote space to tell you that whackjobs like Levant and the zero guy are still whackjobs. But apparently it’s necessary.

“I know you don’t like Trudeau but you do like telling the truth,” says Ted, in Calgary. “The whacky far right ice tea party bloggers are saying that the new liberal budget allows bail-ins on depositors accounts. The next thing will be that Justin was born in Syria or attends the Satanist Church or something.  I am a mid-road progressive conservative and while I don’t mind contrary opinions I find the extreme looniness of the far right hijacking conservatives here as it has ruined them in the USA. Their out and out horse manure is getting too thick on the streets of late. Can you lucidly deal with this garbage once and for all?”

There ya go, Ted. But rest assured, it’ll return. I hear cockroaches can survive anything.