Rapid Fire!!

Lets take a quick peek at a potpourri of items:

Inflate or deflate: A lot of people are cheering on inflation coming down. I disagree with the premise, but the party seems to be gaining a lot of supporters regardless of my opinion. This falls under the be careful what you wish for category. Remember that inflation has a solution, whereas deflation does not. In late 2021 early 2022 we saw inflation rear its ugly ass head, and the BOC and central banks around the globe did what they do – they raised rates to tamp inflation down. About 2,5 years later here we are with a much more comfortable inflation rate. However, there is no cure for deflation. Japan hit deflation in the late 1980’s, and they still struggle with the problem today. Be careful how far you cheer inflation down, because in a heartbeat it can become deflation, and Uncle Tiff doesn’t have any tools in the toolbox to fix that problem.

Off the rails: Well, the rail strike is underway, and already the problems are cropping up. I grew up in the heartland of Ontario auto production, and since the rails stopped taking shipments on Tuesday there is already auto parts plants with backed up product. It isn’t a matter of getting new product in so much as it is getting finished product out. There are already a few plants that will have to shut down in the next few days due to nowhere to put finished product if they can’t ship it out by rail. This could potentially add a hundred thousand auto workers to the unemployment line, or at least the layoff line. Of course that is worst case, and we could get a deal at any time, but it isn’t looking good right now.

Uncle Tiff vs. Uncle Powell: The 2 main central bankers that we look at in our business are BOC Governor Tiff Macklem, and Federal Reserve Chair Jerome Powell. They basically set the policy that our business revolves around. However, there is a key difference in their mandates that I don’t think a lot of people totally get. Uncle Tiff has one mandate, and that is to control inflation. I could give you the long mumbled politically correct edition, but basically his job is to control inflation. Mr. Powell on the other hand has a dual mandate to 1. control inflation, and 2. keep a healthy labour market. The legal mumbo jumbo on the Fed mandate is:

The Fed’s modern statutory mandate, as described in the 1977 amendment to the Federal Reserve Act, is to promote maximum employment and stable prices. These goals are commonly referred to as the dual mandate

So, be very careful when looking at Canadian jobs numbers and thinking Tiff ‘ has ‘ to cut rates. The Canadian jobs numbers do not directly corelate to BOC policy. Now of course lots of unemployed people will cause inflation to drop, which in turn causes rate reductions, but they are not a direct pathway. Whereas, in the US if the jobs number saw 250,000 thousand job losses in one month, Jerome could cut rates instantly, purely based on the dual mandate of stable employment. This is a distinction with a big difference. Job losses in Canada can eventually lead to lowering of overnight rates through cause and effect, whereas it is a much more direct link in the US.

Dance the night away: It was bad enough when realtors took to Tik Tok to dance AFTER a BOC rate cut, but now they are front running the rate cuts. I have seen quite a few realtors that are now ‘predicting’ ( I am sure based on their intense, deep knowledge of finance ) a rate cut at every BOC meeting for the rest of the year, and translating it into house price gains of at least 10%. Of course, the message they eventually come to in the video is that you buy now. Today, actually today is too late, you should have bought yesterday!!!. Of course the argument is that you buy now – even though you can’t afford it, and then refinance later once the rates drop. Of course they know that rates will drop. They know because ‘ trust me bro!!’ . Everyone makes fun of the US and the Buy Now Pay Later plans ( BNPL for short ). Well, Canada has one upped it with Buy Now Refinance Later ( I will now refer to it as BNRL forever more ). It is the 2024 remix of ‘ Marry the house, and date the rate’ bullshit that got spewed over the years. Here is a novel idea……” If you cannot afford to buy the fucking house, then don’t buy the fucking house!!!! ” .

Sold to the highest bidder: After my convo last week with an appraiser where we were discussing power of sales, I started doing some digging, and calling up some contacts. It would appear that the power of sale game is in the 1st inning. Appraisers, lenders, and lawyers are noticing a marked uptick in activity. This probably doesn’t bode well for the fall market, but things always get worse before they get better. A couple of commonalities I have noticed from the 15 or so people I have spoken with across the country:

Banks let things go too long, so they are shortening up timelines. This means you could have a glut as the older power of sales go with the shorter ones to market. Once the glut is over, we should see a trend develop, but don’t base everything on the next 30 to 60 days, as there is likely to be more.

A lot of the power of sales have a lot of damage. Not just your everyday average wear and tear, but doors off hinges, kitchens destroyed, mess everywhere, and a lot of work to be done. One particular appraiser I spoke with said he appraised the house for the repo in May for the bank, and then had to re appraise it now, and the condition deteriorated so much that the value changed by almost $150,000.00 due to damages.

The deals that are going to legal all seem to be people who couldn’t refinance so they just decided to walk away and claim bankruptcy. It’s as if using your home as an ATM for 15 years has consequences. This shocked me, as I thought a lot of the legal sales would revolve around people who bought at the high point, but it just seems to be people who had a better lifestyle for a long time that they could not afford.

Oddly enough: In the early part of the year, every bank in Canada predicted that interest rates would remain ‘higher for longer’. Now, all of a sudden, every bank in Canada has the BOC cutting rates by 200 bps from here. What changed? The economy didn’t get 200 bps worse in 6 months. Unemployment didn’t get worse than expected, did it? Not really. Banks are under a lot of pressure as loan losses mount and profits start to head South. Banks also know that market expectations help drive BOC decisions. Surprises in monetary policy land are not a good thing. So if the banks all sing from the same hymn book about rates going down, do they speak it into existence? The reason I mention this is that on one social media post you have our current government claiming that Canada will be the fastest growing country in the G7 in 2025, but then the next post is all of the smart economists at the banks saying how rates need to be 200 bps lower to ward off problems. Which is it? Sure, rates will head lower, but do they really need to be 200 bps lower? Sounds to me like someone needs their ass saved. How do you bail out a bank from their bad lending and risk decisions without it being called a bailout? Simple, you lower rates and stimulate things so that A ) the bad risks can afford to pay down their debts, and B ) lower rates spurs spending, which leads to new good loans that you can use to offset some of the bad loans that will still go bad. Just goes to show you that banks know about as much as anyone when it comes to the future of monetary policy ( myself included )

Happy Thursday.