Hard or Soft?

I could be asking about a lot of things here……Ice cream…….tacos…… lots of things. However, today I want to look at landings. Yes, that is what we are talking about here. Hard landings or soft landings.

For months now people have been guessing, prognosticating, and wondering if we are headed for a soft economic landing, or a hard economic landing. No ones knows with any certainty, but that doesn’t stop the experts from giving their 2 cents worth. Of course with inflation running hot over the last few years 2 cents ain’t what is used to be either. The thing I absolutely love about this debate is that there will never be a clear winner or a clear loser – it will always be a zero sum game. There is also no hard definition of what a soft landing is, and what a hard landing is. Sure, many people smarter than me have devised their own set of metrics to make a determination, but nothing is universally accepted as one or the other. There is not one single piece of data that will flip a switch and take us from one to the other. An incumbent politician looking for re election will always say it was an engineered soft landing, while a politician looking to gain power will call it a hard landing.

When I was running a financial planning company, people would always ask if we thought it would be a hard landing or a soft landing whenever the famous ‘R’ word ( recession ) was muttered. I always asked those same people ” what difference does it make”? I ask my readers the same thing – what difference does it make? If we cannot define the difference, if there is no proof either one existed, then what difference does it make? Truth be told, the only difference between a soft landing and a hard landing that we know for sure is that the definition is a very personal interpretation of life events. As the old saying goes “a recession is when your neighbour loses their house, a depression is when you lose yours”. I say all that simply to point out that different people will experience the coming weeks, months and years differently, and that difference will shape their opinion of what happened in the economy.

What we are about to head through – economically speaking is welcome to me. We need bad times to make s appreciate the good times. We need corrections, recessions, and economic malaise to reset the cycle, and allow us to move forward. It is the 2 steps forward and 1 step back method. However, I also understand that a lot of people are not prepared for what is to come. There are many folks that feel and think that as soon as the slightest bit of adversity comes along, that the government will bail us all out. And to be honest, why wouldn’t they think that? Governments for the last 15 years have taught us to think that way. But it is a little different this time. This time around, the governments do not have the dry powder to swoop in and bail us all out.

There are dozens of examples I could give you on why the bail out cannot happen the same this time, but I am going to pick on one that is the most relevant to mortgage brokers – the BOC Balance Sheet. Heading into COVID in March of 2020, the BOC had around $122 Billion on its balance sheet. During COVID and the aftermath, the BOC ballooned the balance sheet to almost 593 billion. For those of you that like numbers, that is a 386% growth. Many will argue the actions were justified, and many will blame the housing affordability issues we have experienced since on this. Again, depending in how you experienced March 2020 to April 2022 will depend on your interpretation of the balance sheet expansion. As of July 2024 the BOC has used quantitative tightening ( QT ) to get the balance sheet back down to around 283.5 billion. Even though everyone is jumping for joy, and dancing their lives away on Tik Tok about the BOC rate cuts, no one pays attention to the QT that is still going on. Every month, the BOC is rolling bonds off the balance sheet ( assuming there is maturities in that month ) and removing liquidity from the system. You want to know why there has been 2 rate cuts and no one is buying houses? QT!! You want to know why they project a September rate cut, and credit is drying up? QT !! So long as the BOC is engaged in QT, and liquidity is actively being removed from the economy, it is going to be a tough sled ahead.

So, why would the BOC simply stop QT to make things better? Well, quite frankly, they can’t. The BOC knows that the Canadian economy is a ticking time bomb. That isn’t a shot at the Canadian economy, just economies in general. World economies suck right now. So, the BOC knows that sooner or later the rug pull is coming, and they will be required to intervene and load up the balance sheet again to save the day. So the BOC is in a race against the clock right now to get the balance sheet as low as they can before the economy totally craps out. Since Canada has feasted on housing, the collapse of the economy will be centered around housing, and that is not going to be a cheap fix. The BOC knows this, and the BOC has to be at the ready to help. Currently, the BOC predicts it will stop QT later in 2025. Right now, they just have to figure a way to get the economy to limp to October 2025 without BOC intervention. Personally, I don’t think it is possible. I really don’t think we can get the economy to September / October of 2025 before the BOC is tapped on the shoulder again to intervene and help out.

Of course, data and facts like this might suggest that it isn’t the best time to buy a house, and so that wouldn’t work well for realtors on social media. So instead, these sales people focus on rate cuts. Rate cuts don’t mean Jack if you don’t have a job. Rate cuts don’t mean shit when you can’t afford the daily basics in life. Groceries don’t get cheaper because Uncle Tiff cut a quarter. Gas at the gas pump didn’t go down because Tiff cut a quarter. Gas and groceries might go down if the economy is in the shitter though. Rates cuts happen because the economy sucks, not the other way around.

Remember as you are meeting with clients that their interpretation of the economy and the data will be unique to their life situation, their life experiences, and how they have navigated the last few years might be based on bad data, good timing, or a lack of education. Don’t be quick to judge until you have all the facts. Someone who overloaded on property is 2017 looks like a genius, and someone who loaded up on property in 2022 looks dumb. The same circumstances may have been present, just the timing was off.

We are at the stage of the airplane ride where the captain is coming on the speaker, and encouraging passengers to buckle up. You would be wise to heed the advice. Unlike in an airplane where a seasoned pilot can often navigate over, under or around a source of turbulence, the economy does not have such flexibility. We are heading in to the eye of the storm over the next 120 days and into the end of year 2024. It will suck, but it also brings me hope that we see some washout, and we can begin to build the next economic cycle. Whether we land hard or land sot will be a debate for the ages, lets just hope we land in one piece.