It Was The Best Of Times, It Was The Worst Of Times

Charles Dickens wrote that line in the book A Tale of Two Cities. I am sure at the time, he had no intention of the saying being used to describe the Canadian economy, but here we are. 

As we head into 2024, a lot of people have been reaching out and asking me what I think will happen in the coming year. Now please bear in mind that A ) the market doesn’t give a damn what I think, and B ) predictions in finance are about as accurate as weather forecasters. That being said, what fun would it be if I didn’t put myself out there a bit, and make at least some form of prediction as to what the next 365 days could bring us.

Currently we are seeing the economy in a very awkward spot. Like a group of guys huddled together in the corner of a Grade 8 graduation dance, no one is really sure what the next move is, or where to go from here. We know what SHOULD happen, but it seems every time we thought we knew something in the last 24 months – something completely different happened. To prove that point I will reference the ” if rates go to 5% the entire world is bankrupt” crowd, and I cannot leave out the ” housing can’t drop because of high immigration ” people. Sometimes it is okay to say ” I don’t know”, and try to deal best with the information we are given. Those 3 little words are especially hard for the fellas reading this. 

As Yogi Berra once said ” When you come to a fork in the road, take it”. The Canadian economy is currently approaching the aforementioned fork. Which path it decides to take will depend on how Canadians deal with the information in front of them. Currently we are experiencing an economy that is schizophrenic at best. We have shrinking GDP per capita – more people bringing home less every year, we have high interest rates, unemployment is not as bad as feared, housing is dropping, bankruptcies are increasing, however retail sales keep surprising to the upside. None of this makes sense. Gold, Oil, and bonds are pricing in a recession, while stocks, and the consumer are pricing in a boom. Most of which path we take in 2024 will depend on Tiff and Co. and how the Canadian central bank takes action in 2024. Lets explore:

Option #1

Everyone and their brother’s cousin’s wife’s sister, knows that rates are coming down. Usually when my hairdresser starts telling me that interest rates are coming down in April – it gives me pause. This is the same person who told me bitcoin and weed stocks were the best investment ever in 2020. Mortgage broker Facebook groups have polls as to when rates get cut, and by how much. Like somehow we think that the BOC will look and be like ” Well, 47% of brokers think rates will drop in April, so, I guess we better drop in April”. Come on. Has anyone ever thought that perhaps, just maybe the BOC will be stubborn and hold out? There is a real possibility that the BOC either holds off on rate cuts to teach over-indebted Canadians and realtors a lesson, or is simply slow in reacting to the data coming in. How long did we hear that inflation was ‘ transitory ‘ in 2020, and 2021? When everyone knows that something is a sure thing, it gives me pause to re-think it, and expect the exact opposite. If the BOC stays the course by choice, or by data, we may not see the Prime Rate cuts we are all expecting – and quite frankly banking on. So that deals with the VRM, but what about 2,3,4 and 5 year rates? Again, there is a real possibility if the BOC holds off on cuts that we see yields march higher. The bond is currently pricing in some pretty aggressive cuts right now, and if we don’t get either as many, or get them as quickly, then bonds may sell off, raising yields over today’s current rates. The Canadian dollar has had one hell of a rally in the last 3 weeks, so the currency market knows something right now. Perhaps it is just that the USD got weaker due to their copious amount of overspending, but it could also be reflecting that rates will not drop as quick, or as much as we might think. For reference, currency markets are the most liquid, and deepest pools of capital in the world. What the currency markets do matters more than what stocks, or bonds do. Currency markets usually lead the sea change into cycles, so paying attention to the currency markets gives you a good look into potential future moves. If rates stay high, and the wave of renewals starts renewing into rates with a 5, coming out of rates with a 1 handle, we could see economic activity decline quite rapidly in the back half of 2024, heading into 2025. This will lead to stubbornly growing unemployment, declining real estate and asset values, and you will get an almost stagflation feel to the economy. If rates stay high – whether due to the BOC holding, or due to persistently higher than comfortable inflation not allowing cuts, the book of expectations will have to be re written.

Option 2 is that we see the entire opposite whereby the BOC does start to cut in March/April based on the incoming data. If we start to see rates drop on both the Prime Rate and the fixed terms, it will lead to a rally in government bonds, and it should provide some relief to Canadians with debts. However, if the lower rates lead to housing shooting back up like we saw earlier in 2023, car prices jump up, and things of that like, don’t put it past Tiff and Co to clamp down, and pull a 180. The main difference here will be how Canadians react to changes. If the average Canadian got scared enough with the higher rates, and uses any rate reduction to pay down debt more, then lower rates should be the norm for the remainder of the year. If however we see lower rates, and start bidding up every pre con project 150 miles outside the major metro area – then low rates will be short lived. If lower rates prevail, and companies can forecast normal borrowing, they can do things like expand, hire people, make profits etc. If the bond markets prove to be as volatile as they have this year, it makes it very difficult to project borrowing costs, estimate carrying costs, etc. This makes companies pull back. The old saying was that “the cure for cheap rates was cheap rates, and the cure for high rates was high rates” . 2024 may bring about this saying, and you will get to watch it unfold in real time. If rates get high, then the economy slows down, and they cut rates, whereas they make money to cheap, people borrow too much, inflation ticks up – so they raise rates to deal with inflation.

Personally, I think that we see a very different Canadian economy in 2024. While we have escaped a lot of the carnage – or so it seems, I think a lot has just been postponed. I think that we will start to see the unemployment rate rise, I feel we see immigration slow down, GDP per capita will drop further, and we will stagnate for the year – economically speaking, and we will tread water as the market tries to figure out where we are headed. Housing will be flat – although you will see it move in fits and starts. One day it will be all clear, and the next it will be double digit losses. But have no fear, because realtors will still be telling you that now is the time to buy!!!

2024 will be a year where Canadians will need to put their nose to the grindstone as they used to say, and work harder than they ever have, to have less that they ever thought. Most dollars of disposable income will go towards basic items, and anything left will probably go towards paying down debt. This isn’t to say that, here and there things will seem rosy, but over the course of a year, I think it will be pretty accurate. I have warned that there could be a large liquidity issue coming in 2024, and that will probably be what causes a drop in rates. If we see a large liquidity problem, central bankers will prime the pump by dropping rates to try and spur growth. Unfortunately, it probably won’t work as we saw in 2008, as it doesn’t matter what the rate is – if the bank is too scared to lend the money to you in the first place.

The one thing I will say though, is that it is fully within you to determine whether 2024 will be the worst of times or best of times for your business. Some of the best business years I have ever head is when the economic backdrop was the worst. In a bull market – anyone can do our job. In 2021, no one cared about who was good – they only cared about who called them back. Tough times work very well for seasoned, experienced brokers, and also for newer people working their way up. If you are ready to work hard, add value, and never give up, you will be able to build a very profitable business in 2024 – even if the backdrop sucks. Have the answers your clients need, be ready to stand out in some way, and offer the best value – and you will see a remarkably different year.

Over the Christmas break I will post a couple blogs about some things that may be coming down the pipe that could help you decide whether we see Option 1 or Option 2 in 2024.