This or That

Only a few more days until we see the next BOC rate announcement, and the odds makers on Tik Tok and Insta are already placing their bets. According to the social media finance experts, we are a lock for 25 bps ( actual economists agree with this ) and a lot are calling for 50 bps. It should of course come as no surprise that when you ask someone who profits off lower rates if rates should drop, the answer is yes.

It still baffles the absolute shit out of me that the people who jump for joy about low rates haven’t figured out that rates drop because shit is bad. I can only sound like a broken record for so long, and I don’t think I have the energy anymore to fight and argue with people that dropping rates is actually a bad sign. But, I always remind myself that people like me made a lot of money over the years because of stupid people like this. People who haven’t the faintest f*cking clue about finance usually make poor financial decisions that opens up opportunities for people like me to go in and scoop up. So I guess there is always a silver lining.

However, I want to bring out a couple of data points that really illustrate just how bad things may be. Retail. Sales. Data. If there was ever a data set that needs t be looked at, it would be the Canadian retail sales. We all know what retail sales are. According to the Government of Canada the definition is:

The retail trade sector comprises establishments primarily engaged in: retailing merchandise, generally without transformation, and rendering services incidental to the sale of merchandise.

So basically anything and everything you buy is considered retail sales. The retail sales number has been an absolute shit show as of late. To give you an idea of just bad it is, retail sales since 2023 have dropped .70%. That may not seem all that bad, but consider we have 1,500,000 new people in Canada buying things. Even though we grew the population 2.50%, we saw retail sales decline by more than .70%? Add in the fact that inflation ( cumulative ) over the last 1.5 years has been in the area of 5%, and sales STILL WENT DOWN .70%!!!

So even though we inflated away the value of everything, and added 1.5 million people to buy new stuff, we still cannot get retail sales up?? Holy Christ. This is serious.

Why do I bring this up? Well, you see, for the last 5 or so years, the entire bull case for housing was that we are importing millions of people, and they all need a place to live, so housing has to go up. That was the base case. For years I heard this. So, I ask everyone out in blog land:

Why would adding 1,500,000 new people to a country drive housing demand and prices up, but retail sales down? The easy and correct answer of course is that it won’t. The entire bull case for housing was only immigration – because you could never make a case otherwise. Housing valuations are so far beyond ridiculous, that there is no financial metric that could ever suggest that buying a house was a wise financial decision. When housing valuations hit the stratosphere and no logical, sane valuation could be found, we just started make up bull shit – immigration was the winner. We may as well have said that aliens would visit the planet and make it their new home and drive demand – it made about as much sense.

So, after todays announcement by King Justin, what is the bull case now? Immigration looks like it will slow down immensely, so what is the bull case for housing now? Lower rates? Not likely. Sure rates will come down, but they are gonna have to drop like a stone in the river to get housing anywhere back to affordable from a monthly payment perspective. Because, and there is always a because, even if rates drop back to where they were 2 years ago, or 2.5 years ago, the cost of everything else has gone up – and it ain’t coming back. Property taxes, car insurance, groceries, day to day living – you name it, and it is up. Realtors can dance their lives away ion Tik Tok, but Tiff cutting 25 bps next week ain’t gonna lower the cost of a bowl of Cheerios at the grocery store. In fact, Tiff cutting rates will actually harm incomes for banks and insurance companies which may actually force premiums and service charges up higher.

Canadian cost of living is now a ‘this’ or ‘that’ scenario. Either you buy a house, or you afford to live – but a lot cannot afford to do both. Don’t believe me, well here is an interesting statistic for you:

In the same time that retail sales are down .70%, credit card debt in Canada is up 21%. What the fuck? If credit card debt is up while sales are down it means people are using credit cards for cash advances to pay for lifestyle. What else could you do with a credit card? You either buy something, or you cash advance it to take money to pay bills. Well, retail sales tell us it isn’t going on buying stuff, so the alternative is…….

Sure, the BOC is likely to drop rates next week by 25 bps, and that will give a little relief for variable mortgage holders, and LOC holders, but it won’t save the day like everyone thinks. The data out of Canada is getting worse and worse, month after month. Housing listings will continue to pile up like we are seeing, and prices will eventually have to start dropping.

Last week at Jackson Hole, Wyoming we saw Jay Powell give his wonderful speech. He said what we all knew – rates are now going to come down. Well duh! We pretty much knew they weren’t going up. Interestingly enough though, if you parse through the speech Jay Powell gave, you will notice that he said the next move is down, but stopped well short of saying WHEN that drop may be. Could it be the Fed meeting later in September? Maybe, and quite possibly, but the when is now more important than the if. We know rates have to come down, whether it be in the US, Canada or around the world, but if rates held where they are for another 3 months or 6 months BEFORE dropping, that would change the economic landscape as opposed to dropping next month.

Central bankers are now in a competition between lowering rates and keeping inflation in check. Many Canadian are priced out of housing, and have to choose between buying a house or paying the bills. It looks like we are all playing the ultimate real life game of this or that.