Daily round-up: Wednesday, September 8, 2010

Hello all

Here’s a quick recap of the day’s must-read articles:

The big news of the day is the rate announcement by the Bank of Canada, which raised its overnight lending rate another 0.25% to 1%.  This will impact those with variable rate mortgages.  As you likely know, I’ve been dead wrong about the direction of interest rates in Canada for the past few months.  There is virtually no inflation as it is, and what inflation there is currently is set to be overwhelmed by the contracting money supply and slowing of the velocity of money.  I think Carney knows this.  I can’t help but think that he will try to orchestrate a bounce in economic activity similar to the great reflation of 2008-2009 by crashing interest rates again once the economy visibly weakens.  It is my conviction that we will once again see the emergency level interest rates we saw in 2008-2009 before a serious round of tightening.  Best investments in this scenario: long bonds (xlb-t), long dated strip bonds, and fixed preferred shares (avoid financials).

Best article of the day award goes to this beauty by the Financial Post: Rising debts cancel low-rate savings.  Here are some of the key quotes:

“Any savings Canadians have realized through this period of near-zero interest rates have been all but wiped out by the large amount of debt households have taken on, new research shows.”

“As a result of the rush into home ownership over the past decade that saw housing prices soar, mortgage principal payments as a share of income are now double what they were in the early 1990s, when interest rates were in double-digit territory.”  Wow!  And to think that interest rates really only have one direction over the long-term (though they will likely decline further in the short-term).

“Yet, Canadian households — whose debt-to-disposable income levels now exceed 140%, a record high — continue to take out loans at a robust rate, with central bank statistics suggesting household credit expanded at an annualized 7.1% pace for the three-month period ended July 31.”

Money creation at work.  Of course that money must be repaid.  The coming secular shift towards frugality, savings, and debt avoidance will ensure adequate currency destruction to ravage real estate prices.  Bummer.

Honourable mention for an excellent similarly themed article goes to this gem over at Seeking Alpha titled “Canadian Housing: Another Debt-Fueled Bubble. Also a fantastic read!

Also, new building permits dropped 3.3% in August over July, the fourth straight monthly decline.  This is to be expected given the collapsing sales volumes.  Considering that the construction industry represents 12% of GDP in Canada, it’s not hard to see how a stalling in construction will exert a heavy drag on GDP growth going forward.  It’s a big reason why I’ve been calling for a recession in Canada by Q3 2011.

Finally, gloom (or perhaps reality) is starting to set in with Canada’s small business owners as confidence has begun eroding over the past few months.  This is bad news, since small businesses generate almost 40% of private sector jobs.  As confidence in future business prospects deteriorates, small business owners do less hiring.  Naturally.  Not good.

That’s the day it’s been.

Cheers all!

Ben

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One Response to Daily round-up: Wednesday, September 8, 2010

  1. Pingback: Bank of Canada interest rate outlook; Consumer confidence in the dumps | Financial Insights

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