China inflation comes in higher than expected; Jarislowsky sees the bubble; Bonds continue to get smacked

China inflation comes in higher than expected

In what may well seal the fate of rumored interest rate increase by the PBoC, official inflation rates just released from China show inflation at a 28 month high.  It came in at 5.1%, well above the consensus 4.7 percent, and way above the current deposit rate of 2.5%.  If the PBoC doesn’t act, they risk money fleeing deposits and fueling even larger speculative bubbles.

The official (arguably massaged) numbers showed food prices increased 11.7 percent in the year to November, with producer prices up 6.1%.

Broad money supply rose last month by 19.5 percent, the fastest gain in six months.  It has surged 55 percent over the past two years and outstanding yuan-denominated loans have climbed to 47.4 trillion yuan, 60 percent more than in November 2008.

So…..the PBoC either raises rates and curbs inflation very soon or faces the inevitable consequences that naturally follow when people are robbed by the now not-so-subtle hand of credit inflation.

Jarislowsky sees the bubble

While the bank employed economists don’t see Canadian real estate valuations as particularly problematic, those whose income is not derived from a credit-issuing institution with an obvious bias towards maintaining the status quo see things very differently.

Enter Stephen Jarislowsky, the 84-year-old billionaire investor and CEO of Montreal-based Jarislowsky Fraser Ltd.  He had this to say in a recent Globe interview:

“Interviewer: Canada’s banks got high marks from the International Monetary Fund for escaping much of the carnage that ravaged U.S. and European financial institutions in the wake of the global financial crisis. Have they done enough to leverage that position?

Jarislowsky: Yes and no, but here’s the thing: In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels, salaries are shrinking and a lot of Canadians are heavily indebted. There’s a lurking disaster, to the extent that you have reduction of purchasing power and we are just not saving hardly anything as a nation.

Interviewer: That’s pretty bearish.

Jarislowsky: I think things are going to get a hell of a lot worse. We still have a trade deficit today despite the fact that commodity prices are incredibly high.

I hope I’m wrong but I think Canada is on the edge of a lot of trouble.”

Pretty sure this guy is my grandfather.  We’ve got the same DNA.  I’m sure of it.  Now if only I can leverage that into a fat net worth like Grandpa Steve.

Bonds continue to get routed

Bonds on both sides of the border continue to get beat up as people increasingly worry about the long term integrity of government finances.  Perhaps it’s oxymoronic to use the terms ‘integrity’ and ‘government finances’ in the same sentence.  I digress.

As it relates to real estate, the price movements on the 5 year Government of Canada bond will be particularly troublesome if they maintain their current course.

As part of Jim Flaherty’s mortgage tightening earlier this year, new rules were introduced with regards to how variable rate mortgages would be approved.  As of April of this year, banks have had to approve variable rate mortgages based on the 5 year posted fixed rate.  In other words, even if a home buyer wanted to take advantage of the cheaper variable rate, the total amount they would qualify for would be calculated as if they were paying the higher 5 year posted rate.

It hasn’t been an issue yet since 5 year bond yields (upon which the 5 year mortgage rates are derived) have done nothing but fall since April.  But that’s no longer the case.  If this current trend continues, it absolutely will cut into the total mortgage amount that households can get approval for, as the big banks have already began raising their rates in response to the recent bond price movements.

This might get interesting.

-Ben

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5 Responses to China inflation comes in higher than expected; Jarislowsky sees the bubble; Bonds continue to get smacked

  1. Sam says:

    Banks if not hedged could be in real pain, but they always hedge those safe Canadian banks right? They have massive spreads and can absorb these shocks. The difference between the posted rate and the 5yr swap is massive.

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