Take A Pill

To quote Charles Dickens “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair”

I feel that no other quote in history explains exactly where we sit in finance right now. The bond market, especially in Canada seems to have the worst case of bi polar I have witnessed in my career. Nothing seems to make sense these days. Did Mr. Market forget to take his medication the last couple of weeks? Let’s look:

Wednesday was the best of times ( for variable rate holders ) and the worst of times ( fixed rates actually crept up on the day ). While Uncle Tiff played a game of hold my beer with the BOC announcement and dropped the overnight rate 50 bps, fixed bond yields actually increased on the day – the outlier being the 1 year yield which did actually drop 3 bps. But when you see a big drop of 50 bps on the overnight rate, and only 3 bps on the 1 year, something is off. Uncle Tiff also has a little bit of bi polar going on as he went on and on about how bad things are, but then UPGRADED the 2025 growth outlook? Like what the fuck? So things are bad, but also good….. it truly is the best of times and the worst of times…..apparently.

According to realtors it is the best of times ( to buy a house, hurry up, you may never get another opportunity ) but it is also the best time to list your house ( before you lose it to the bank ). Apparently bi polar runs in the real estate gene as well.

Bi polar is also rubbing off on the stock market right now. We have global stock markets sitting at or near all time highs, yet somehow the economy is falling apart? Never before have I seen an economy so weak to require emergency jumbo rate cuts from the central banks all the while companies are reporting blow out earnings and the market is at an all time high.

Banks are also suffering from some effects of bi polar these days. Canada’s big 5 are reporting record earnings, but also experiencing record loan loss provisions. They are making more, spending more, and charging more. Although, for the Canadian Monopoly Banks, let’s face it – it is always the best of times. Can you imagine how bad things would have to get for banks to start loosing money? Then it would truly be the worst of times.

But, it doesn’t stop there. Politicians are also suffering from the immense bi polar outbreak. According to the Canadian finance Minister the fact Canada is dropping rates quicker than a prom dress is a great thing, and proof that their economic plan is working. According to the official opposition party, the fact that we need to drop rates so quickly is actually the problem. Now, in all my years of finance, I have never seen a book, a course, a speaker, or a successful person shout that things are going so well that the economy needs jumbo emergency style rate cuts. Actually the reason we need jumbo emergency rate cuts is because things are so bad. However, politicians aren’t exactly Harvard finance grads.

Economic numbers also want in on this cool new trend, and are also living up to the entrance exam. When you break down the Canadian CPI numbers there are a lot of things that are going up in price ( inflationary ) and a good number of things that are going down in price ( deflationary ). Best of times and worst of times all rolled into one reading.

So what are we to make of all of these situations? Are things good, or are things bad? Are we in the age of foolishness, or the age of wisdom? Are we about the enter the Spring of hope, or the Winter of despair? I think we all have that gut feeling that tells us the answer.

So, what is the answer, and how do we make Mr. Market pick a side?

A lot of what is going on in the markets right now isn’t so much related to finance as they are to politics. We all know how the US affects Canadian finance. In the US we are less then 2 weeks away from a pretty big election This election, depending on the outcome will swing the country to the extreme left, or the extreme right. It is basically a vote on socialism or capitalism. The polls are extremely close right now, and as such, all the market participants have to hedge out positions, initiate and close out positions they have had, and be ready to enter new positions, for better or for worse, depending on the outcome of the vote on Nov 5. With the US vote being a fairly even split right now, Mr. Market is not going to get his bets too far off to one side or the other, and will keep some hedges on in case the outcome is the one they don’t expect.

While the date of the Canadian election isn’t certain, we can be certain that Canadians will be heading to the polls in the next 12 months. Again, the vote appears to be split, and the stakes are almost identical to the US. Canada will either go farther left, or steer to the right. It is too tough to say at this point, but the big uncertainty factor is the “when”. With the US fixed election dates, traders, money market participants and speculators can hedge around a certain date. With Canada, an election could be called tomorrow, or it could be called 11 months from now – no one really knows. Mr. Market hates uncertainty, so to try to decrease some of that, hedges get put on by financial players to blunt the impact of a potential snap decision.

Money was always designed to flow to where it can be the most beneficial to its owner – whether that be a person, a business, or an investor. But, over the years, and really in the last couple of months, money has been manipulated to serve another master – government. Every time the government meddles in a market it creates an inefficiency for money and money starts to flow to other places. When the government and the BOC intervened in the markets after COVID and drove rates down, it made money flow to housing. Housing shot up and is still at these stupid ridiculous levels. That is just one example.

We need 3 things for bi polar disorder to be treated in the markets:

1. We need political certainty on both sides of the border. Once markets know what party is in, or looks to be winning in the case of Canada, markets will start placing their bets to cash in on the policies of that government. The more political certainty we have, the faster bi polar will start to disappear.
2. We need to see central banks get closer to the bottom of the range, and stop the jumbo cuts. Jumbo cuts always precede bad news and a shitty economy. Half the population is jumping for joy that Tiff cut 50 bps, and the other 50% of the population is walking around thinking we are in for some pain. I am the second 50%. I am now at the age where I can be called old, and I have been in the financial markets since my teens. I am like Farmers Insurance ” I know a few things, cause I have seen a few things”. We need the chances of a 50 bp cut at the Dec 11 meeting to go to zero. We need markets to start debating whether Uncle Tiff cuts 25 bps or zero. Once we are debating 25 bps or zero, we are near the lower end of the overnight rate range, and markets can start to price back in growth. Jumbo rate cuts give oxygen to the crowd that keeps telling everyone rates are going back to 2021 lows ( realtors ). The sooner we eliminate that possibility, the sooner we can get a level market. In 2022 when central bankers started hiking rates in 50 and 75 bp increments, the markets shit the bed. When a central banker raises rates 50 and 75 bps at a time, it means they are behind the curve. Markets hate central bankers behind the curve. Being behind the curve means volatility is coming. Central bankers moving rates ( up or down ) at 50 and 75 bp increments is a great way of announcing they are out of touch with markets.
3. We need central bank meetings and Statistics Canada releases to go back to being boring. I have never seen a following of BOC meetings, and stats Canada report dates like I have in the last 18 to 24 months. It is almost like a damn Taylor Swift fan base. I know RMG has BOC watch parties, and Bruno Valko goes over the numbers. I have said it before, but I will say it again – Bruno has some of the best Canadian numbers up to the minute on his emails he puts out. If you want to know what numbers will effect your mortgage business in one place – Bruno’s email is probably the place to get it from. While he and I differ sometimes on what the numbers may mean, I have always encouraged healthy debate and discourse. All that being said, I cannot wait for the day when RMG no longer has the BOC watch parties. I can’t wait until they get almost no attendance for those. Not because I think they are bad, but I want the BOC announcements to become so boring that no one wants to tune in anymore. That tells me that we are healing. That tells me that things are getting back to normal.

So, political stability, the BOC getting to the lower end of their range, also generally referred to as the ” neutral rate “, and no one giving a crap about the BOC meetings and Statistics Canada report releases. That is what we need to get markets back to where they need to be. In the mean time, maybe we can medicate ( I hear Jack Daniels and Johnny Walker are great self medicating items for people in our business ) ourselves, because there is no pill we can give to get rid of the bi polar in the markets. Markets will continue to act like it was the best of times and the worst of times, depending on the day.