Entries from June 2019 ↓

The head fake

Recall that advice to lock in your ultra-cheapo mortgage? And to use the bank’s dough instead  of your own when buying real estate?

Well, more evidence this makes sense. If you’ve been waiting for the central bank to punt the cost of money, it could be a long stretch. It won’t be happening in July. Or perhaps the rest of the year. Just in time for the October federal election, guess what? The economy’s revived. What a coincidence.

First came the inflation news. Wow. It’s 2.4%. So if your HISA or GIC isn’t pumping out a lot more than that (to compensate for the stiff tax on interest), you’re losing. Fortunately balanced portfolios have been steamy lately – up about 9% so far in 2019. This also means locking into a five-year mortgage at 2.5% or close to it is a brilliant move. Free cash, baby. What are those lenders thinking?

It’s a war. Mortgage originations are w-a-y down thanks to a plop in sales, the moister stress test, turgid incomes and prices which stuck in the red zone. Banks and brokers need to move money. Home loans at insane levels are the response. If you need money, well, come and get it.

Sadly many people have bought into the meme that rates will continue to push lower. New data shows this is unlikely. In fact, the next Bank of Canada move could actually be higher.

Core inflation is surging and central bankers know if they heap more stimulus on the economy (via cheaper rates) the cost of living will continue to rise. That’s a negative, since a key mandate of the bank is to maintain price (and currency) stability.

Second, the economy is rebounding. Just the way BoC boss Poloz told us it would. Despite the Chinese, Trump’s trade wars, Comrade Horgan, hapless Ontariowe and all the pissy peoplekind in Alberta. The April numbers came out Friday. Yuge. Annualized growth north of 3%, and that comes on the heels of a strong March – in fact the two-month swell is the greatest since the end of 2017 (before real estate laid an egg). The oilsands are humming again, thanks to the NDP’s production cuts (sorry, Jason), however car sales have slumped. Overall, a bright picture.

Inflation, jobs, growth all up. Why should rates fall?

So is the Ploz right? The unemployment rate has dropped to 5.4%, which is the lowest since 1976 when people had big hair and sequined bellbottoms (still have mine). The new NAFTA is sealed. Commodity prices have surged. The dollar, too. So with rising employment, higher inflation, a strong currency and robust GDP, why would rates drop?

Truth be told, the central bank doesn’t want to lower the cost of money. If the latest economic numbers are correct (there’s already some dispute over that), it now has justification to sit on its hands for months on end, then surprise us with a bump.

As for the States, Mr. Market has priced in three Fed chops in 2019, but there all that could change on a dime if Trump (a) woos Xi or (b) nukes Iran. Place your bets on either.

The only clear messages are this: (1) when you can borrow money at the inflation rate why use your own? (2) Don’t dawdle.

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Hmmmm. What if investors have played this all wrong, and rates do rise in the next few months? What if Trump pulls it off, oil pops on renewed global growth prospects, trade tensions ease and markets melt up?

Then you’ll sure be happy if you ignored the wailing and moaning in this blog’s steerage section and loaded up on unloved, abandoned, besmirched and cheap assets like preferred shares. Prefs are hybrids of stocks and bonds, have less volatility than common stocks with fixed dividends generally higher than equities (ETFs currently pay 4.75%) and deliver the dividend tax credit. The market’s dominated by rate reset prefs, which gain in value as interest rates rise, and lose capital value (but pay a higher yield) when they fall. Lately preferreds have been on the outs as prices slumped. But this is why they now look so tasty.

Investors, coaxed into believing rates will fall further and a recession occur, have priced prefs to reflect this. But increasingly that looks like an extreme view. Growth, inflation, employment and commodities are all up. Trade tensions can vanish in a single political embrace. Central bankers have a great reluctance to cut, knowing the distortion that brings. Besides, stocks are expensive and bonds have recently jumped. In contrast, high-yielding, blue chip-quality preferreds are (like me) cheap and attractive.

Or, you can buy something that’s already gone up. Everybody else is.

The abnormal

As much as I hate to do this, a few words on BTC.

The blog’s trigger-happy DELETE button has seen a lot of action in the past week as crypto cowboys flooded here to pump Bitcoin and pretend they know what they’re doing. Of course, they do not. Nor does anyone. Bitcoin’s not money, not even a legitimate security. It’s backed by nothing and does nada. You can’t actually spend it, or even easily store it. The exchanges trading it are often flaky, failed or felonious. Just ask the clients of Quadriga. Ouch.

BTC is a lottery. A pure speculative play. As such, backed by zero in real assets, it has the potential for wild volatility. Thus it went from dustbunnies to almost $20,000 a unit in months, then collapsed to $3,000 and had since jumped magically to over $10,000. Those ‘investing’ in Bitcoin (or its digital spawn) may justify their rashness by saying this is the future of money and blockchain technology may change the planet. All possible But that doesn’t make this a stable thing to own nor a place to put precious capital.

Comparisons with the turn-of-the-century dot com phenom are strong. Investors gambled billions on Internet startups with bold ideas and scant revenues, simply because everyone knew the world would go online. It did. The Internet’s changed everything. It’s a true, historic human revolution. But most dot-com enterprises were 95% hype and 5% legitimate. They failed. Tech stocks ultimately lost 80% of their value and took more than a decade to recover. It turned out the connection between The Future and profitability was a tenuous one. Investors became crispy critters.

What’s different this time?

Not enough.

Bitcoin jumped the better part of 40% this week. Yes, in one week. But it also lost 12% in less than 10 minutes. In one day the price swung about 15%. Given the recent run-up, it’s fairly likely the mythical currency could lose a third of its value in the next few days. Or weeks. Maybe by sunup.

Why the renewed interest in this moister moolah?  Blame Facebook’s announcement of a new digital, spendable thingy called Libra, due to launch next year if it can possibly integrate with the existing global payments systems. The betting is an online behemoth like FB, rich in cash and resources, might actually find a way of making crypto work in the real world. Meanwhile the Fed, America’s central bank, has gone dovish. That means interest rates are expected to fall as 2019 progresses, with an easing of monetary policy, more economic stimulus and a consequentially lower US dollar. Gold has benefited. So has Bitcoin. After a long tightening cycle and stock market inflation, a bunch of money is looking for the next play.

If you want to buy BTC, good luck. It could soar quickly and make you a bundle. You could lose that in a week or two. The volatility is extreme, and the whole point of a 60/40 portfolio is to mitigate big swings and quell the unbridled human emotion that leads to crazed decisions. Normal people, in other words, do not own Bitcoin. And on this blog, as you may have noticed, we’re all normal.

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While the Fed looks poised to drop interest rates, no such luck in Canada. Mr. Market has pushed the beaver buck up a couple of cents recently on that expectation. Now some economists are speculating it could swell from 76 to 78, perhaps even 80 cents, before the Bank of Canada falls into line with a drop next (maybe) winter.

Meanwhile, hungry lenders have slashed mortgage rates in what might be a brief but intense war. The Big Guys are under 3% on fivers, and loans are available through brokers at 2.5%. Given that inflation’s 2.4% this is, like, free money. Why would you raid an investment portfolio (up close to 10% this year) to buy a house when the bank’s cash is so much cheaper?

Well, this weekend could change things. Trump meets Xi in Japan. If the US and China come to some kind of détente, or understanding or simply agree to re-open trade talks, markets are likely to cheer. Stocks up. Bonds down. Yields rise. After all, 45 wants to go from being Mr. Tariff to the guy who did an historic trade deal, just as the 20-odd Democratic contenders start gaining public attention. Betting against America before the 2020 election is probably a very bad idea.

The bottom line: lending rates may well have hit bottom. House prices, of course, have not. But if you have to buy, borrow big.