On September 4th the Bank of Canada will be meeting. At that meeting, they will share with us their thoughts about the Canadian economy. As of writing this post the implied odds of a rate drop on Sept 4th is 20%, the odds that rates will be lower by at least 25bps for Christmas are 100%, and another 25bps drop is also priced in before next June. Most economists believe that this might not be enough. However, most economists also thought we were heading into an increasing rate environment just a few months ago.
The problem with economists and central bankers is the same. Everyone has a plan until they get punched in the face.
Over the past 10 years, the global economy has experienced tremendous growth. Equities have rallied and housing prices have increased drastically. In fact, almost all asset classes have seen a tremendous increase in value. This is not because we have had a significant technological advancement, or because of some incredible invention that has made us more efficient, creating a multiplier effect on our economic output. It is because the advanced economies of the world printed more money than usual and reduced the interest rates on that money to effectively 0%, at the end of 2008.
The growth we have seen is the result of more money flowing into our economies with rules on it. Money meant to increase asset prices, money meant to inflate stock prices, money meant to make our economies appear healthier until the point that our economies could “take off on their own”. They tried, and it looks like it might not be working.
The fragility of our world economy is highlighted by its sensitivity to the China-USA trade dispute, which by the way will get solved before the November 2020 election. The easing of tensions between China and the USA will only bring to the forefront the remaining economic issues the developed world must deal with, like the insurmountable pile of debt we have accumulated since 2008.
Over the past 3 years, central bankers began to increase rates in Canada and the USA. Our Canadian central bank cited various strengths in our economy as the reason for increasing rates. You may remember that at the time I called out the central bank for increasing rates for the sole purpose of being able to decrease them later in the face of a coming recession. Here is a link to a previous newsletter where I compare the economy to a boat trip. The wiggle room created by that monetary policy over the past few years will hopefully give Canada enough ammunition to combat a slowing economy now. If we didn’t have room to drop rates, we would have to engage in even more risky policies that could damage our future economic expansions.
The trick to navigating out of a recession is probably pretty similar to avoiding a punch in the face, its all about timing and movement or action. With the right timing and movement, you can either avoid a punch in the face or at least lessen the damage. It is, for this reason, we will see The Bank of Canada err on the side of caution when reducing rates back down to stimulate the economy. The sooner a rate drop occurs the less likely more rate drops and monetary policy will be required, thereby lessening the damage of this punch we are about to take.
Global trends should give us some idea as to what is coming
25% of the world bond market now trades at a negative yield. That means investors are paying to buy bonds, believing that one day in the future someone else will be willing to pay more to hold the same bond. That belief is the reason why over $16 trillion worth of bonds are trading at negative yields, and that number is increasing at about $4 trillion a month.
More than 30 central banks around the world have cut their policy rates in 2019.
In the past 12 months, gold, which is typically a safe haven during times of economic uncertainty has increased in value by 25%.
How do you save money or make money in this environment?
- If your variable rate mortgage is not at least prime – 0.80% it is time to break your mortgage and get a better discount.
- If you are considering a new mortgage take a close look at the variable rate offerings out there, they are as low as 1.30% below prime or 2.65%.
- If you have any debt outside of your mortgage consider using the equity in your home to pay that down now, before it is too late.
- If you are relying on someone to manage your money and they have your money in an equity fund, book some time to sit down with them to discuss your other options.
All economic signs are pointing towards us getting punched in the face, it is only a matter of time. My job is to make sure that you are prepared and able to take advantage of the uncertainty.
Ready to take the next step with your home financing?
Get started with a free home financing quote now to compare your borrowing options or call us at 416.766.2666 to review your options today.
