Anyone Have A Pinecone?

Will he, or won’t he? That seems to be the million dollar question these days. Will Tiff lower rates on June 5th, or will he continue on the status quo of doing nothing? Never before have I ever seen so many people outside of the Capital Markets world worried and watching a central bank announcement. Never before have so many people cared about so little of a potential change.

The Bank of Canada finds themselves in a real problem. They have painted themselves into a corner, they are in a jam, or perhaps you prefer a pickle, but the reality is that no matter what they do, they will cause problems. The problem that the BOC finds itself reminds me of a time that me and a friend went on a long road trip. Half way through he found himself really having to, well, relieve himself. I pulled over, let him out, and he wondered into a small wooded area. It seemed like good news at that exact instant, however, when he got around to finishing, he had no toilet paper. He had a choice between a pinecone or some poison ivy. Neither was a good choice, and both had repercussions. Pain now, or pain later. The BOC finds themselves in a very similar scenario – pain now, or pain later. Interestingly enough, both of these situations could have been avoided – my friend by using the facilities before we left, and the BOC by raising rates when they should have in mid 2021, instead of sticking to their ‘ transitory’ narrative for far too long.

Central bankers of course are a special breed and have a habit of doing things too late and at the wrong time. Legend has it that central bankers are the only ones to have sex, then put the condom on and take their date out for dinner afterwards. Of course many people have certainly taking a good bending over from higher rates lately, so maybe there are some parallels there as well?

However, back to the main topic: What will June 5th bring? Anyone who says they know the outcome is nothing more than a liar, an idiot, or perhaps even both. The current odds are about the same as a coin flip. There is data to suggest they cut 25 bps, and there is just as much data to suggest they stay the course. For what it is worth, I hope they hold rates where they are. Too much damage will be done, in my humble opinion, if they cut too soon. If we see the BOC cut rates by 25 bps, it will mean all the talk of bringing inflation down to 2% was all for not. Inflation is not at 2%, and while the last couple of readings have shown slow progress down toward 2%, a reversal now will certainly re ignite the inflation problem, while at the same time losing the credibility the BOC has. If rates do indeed get cut, it will be an orgy to go and buy shit. Shit we don’t need, but people will think that the cycle is done, the tides have changed, and will spend spend spend, and re ignite the embers of inflation that are slowly cooling off.

On the other hand, holding rates will most certainly dash a lot of people’s hopes, a lot of positive sentiment in the market, and could drive the Canadian economy into a real nose dive. Even though rates have been high for a little over 2 years now, we still have not had enough time for the medicine to work. Remember that time you were prescribed some medication, and even though it said to take it for 10 straight days, you stopped taking it after 6 because you felt better? Same problem here. We need more time with higher rates for people to really feel some pain and make sure the lesson sticks.

However, I am gonna share a little secret with you. Are you ready? Promise you won’t tell anyone? Okay, here goes: HIGH INTEREST RATES AREN’T THE FUCKING PROBLEM!!! Yup. And before you ask, I just had my mental health evaluation and came out with a perfect score, so I haven’t lost my marbles. Interest rates are simply one ingredient in a baked piece of crap cake of an economy. Much like you can’t put an egg in a bowl and expect brownies, interest rates – high or low, are not the issue. However, high interest rates COUPLED with high debt loads are a serious fucking issue!! If interest rates alone were a problem, everyone would have issues. However, there is a good chunk of the population that is doing quite well with high rates. Savers, for example are one group. People who have little or no debt are another. Interest rates are like a rewards program – it rewards people who make good choices, and punish those who don’t make good choices. Now this is where everyone pulls the ” but, housing is too expensive” crap. Yes, yes it is. Interest rates played a part in expensive housing, but so did shitty government policy, municipal red tape, taxation, and a whole litany of other things. Interest rates being super low for a period of time was akin to receiving morphine after being in a car accident. It didn’t fix or cure anything, but it made you feel fucking invincible. Too many people got drunk on the morphine, and now that the drug has worn off they are realizing that they have broken ribs, a smashed up face, and their left leg was amputated. High interest rates didn’t cause the problem, they are simply a symptom of Canadians spending orgy.

Of course, high interest rates are a great thing to blame. It is too hard to blame ourselves for overspending, living beyond our means, and buying shit we had no business buying. The ‘ keeping up with the Jones’ disease’ was real in Canada, and only now are we slowly getting weaned off of it. We need higher rates for longer to kill the ‘ spending’ infection we have.

It is at this point I fully expect to receive hate mail from realtors, brokers, contractors, builders, and anyone who has contracts on 5 pre builds, but good news – I don’t give a shit. I don’t have to lie to make a story sound good to get a deal to make a commission to make a payment on a jet ski I never should have bought. Nor do I have any interest ( no pun intended ) in propagating bullshit anecdotes to further any agenda. I am simply calling it what it is.

However, for anyone interested, it looks like markets – specifically the Forex market is betting on a hold, while the bond market is still flipping quarters to determine the outcome. The Canadian dollar has remained fairly steady in the lead up to June 5th. If we start to see the Forex market move wildly one way or the other, it will give us some potential market insight into how traders think the decision will go. Over the last couple of weeks Jerome and Co. in the US has been extremely bullish on holding rates where they are, stating over and over that inflation is still too high for them to look at cutting rates. Not that Uncle Tiff can’t cut rates without the US, but it certainly makes it a higher bar to clear when you have the US doing something different. The Canadian 1 year bond is currently pricing in a total of 25 bps of cut, so even if we get a get on June 5th, it may be a one and done, or maybe a stretch to 2 and done. 1 or 2 rate cuts will not be the panacea to save things.

With the bond market split down the middle on the decision, Tiff will crap on about 50% of the bond market hedges no matter which way he goes. The only question is will he wipe with a pinecone or poison ivy?