Feeling the Vibe

It seems that every day I learn something new. This past week I learned that the economy doesn’t actually suck, it is just that Canadians got the Vibe wrong. I am not exactly shocked at this, since the current party seems to have a different take on finance, but to tell Canadians that they just aren’t ‘feeling it correctly’ it has to be over the line.

Vibecession ( not to be confused with a vibe session, which is something completely different ) is not even a word, but yet it is being used by the current finance minister to tells us where the economy stands. Of course this is from the same government who thinks budgets balance themselves, and the party who’s leader “doesn’t think that much about monetary policy”, so I can’t say as I am completely surprised. I thought the government had completely committed fraud when they started telling Canadians that interest rates dropping were a sign of economic progress, but I was wrong. Now, they can’t hide the truth of a shitty economy anymore, so they just tell the average Canadian that it is their fault because they don’t have the right feeling? It should b a crime to lie to people as much as the current finance minister has.

But, naturally, the government can now claim we are not in a recession in Canada. Of course we are not in a recession, we are just in a vibecession. Never mind that GDP per person has sunk to levels lower than 10 years ago. Forget about the unemployment rate climbing higher and higher. Ignore the rising delinquencies on credit cards, auto loans, lines of credit, and mortgages. The average Canadian is farther behind today than they were 10 years ago, but lets not do anything about it – fuck no!!! Let’s just blame the average Canadian’s read of the room on the economy. If we blame the average person, then it certainly can’t be the governments fault.

But making up words, and blaming the citizenry for the problems wasn’t the only dumb ass move made last week. Of course we came up with a half baked program to mail money to people in the form of rebate checks…..well, hopefully Canada Post is off of strike by the time the checks roll out anyways. Yes, Uncle Tiff is trying to carefully, piece by piece extinguish the embers of inflation and re build the economy, and then you have the fiscal branch of the government walking around playing with open flame at a gasoline refinery. You want to see inflation get re ignited? Simply print money – that you don’t even have – and mail a check to damn near everyone. Well, kind of everyone, except students and retired people – that outa go over well at the voting booth. Simply borrowing money from the bond market to print money to mail checks to people is the very definition of inflation. And who will pay the higher interest cost on the debt?? Oh well, the next generation can deal with that.

Since we are creating some inflation, lets remove some tax – not all tax of course, off of everyday items for like 2 months? Yeah, that should do it. You know, like remove the GST off of kids lego, but not off of adult lego. Make small businesses ( the backbone of the economy ) spend the busiest month of the year reprogramming their cash registers, and working through a legal and accountant based nightmare for a 2 week tax holiday. Good thing they took the GST off of booze – a lot of business owners are going to need to drink after the nightmare before Christmas. Again, removing taxes may be a popular move, but it simply creates inflation. People will spend more money if taxes are reduced. So while Uncle Tiff works to beat inflation, you have the federal government not only encouraging inflation, but actually creating it.

As luck would have it though – this entire thing is all smoke and mirrors. Unfortunately for the vast majority of homeowners the $250.00 rebate check and the small GST break will be a drop in the bucket compared to what higher bond yields will cost them. It has always amazed me that people do not see through programs like this and actually break down the true cost. The average mortgage in Canada sits around $470,000.00. If the governments stupid, reckless, hair brained, half assed scheme adds only 2 bps to bond yields on average, that means it will cost the average homeowner $940.00 a year in increased interest costs on their mortgage. On a standard 5 year term the cost is over $4700.00. If this stupid idea adds 5 bps on average to the bond yield, then the average homeowner can look forward to spending over $11,000 in 5 years. HHHMMM, spend $11,000.00 to get back $250.00 plus some tax free items at Christmas??? What to do, what to do?

Now, of course people will argue that there are no direct links here. Of course they will argue – but they would be wrong. Increasing government debt, while increasing inflation will have a direct link to both bond yields AND the overnight rate. Almost right after this announcement from the government, markets went from pricing in a 50 bp cut in December to a 25 bp cut from Tiff and Co. You saw what 5 bps added to the cost of a mortgage over 5 years, now do 25 bps!!! Sure, there was a couple of other factors that also came out last week that may have been reducing the odds, but nothing like inflation getting re ignited will drop odds of a rate cut.

For now though, we have the 5 year bond yield back under 3.00% so that should lead to some rate reductions. The big drop was on Friday though, so that may have been a little misleading. Friday has a lot of US trading desks off for vacation for the holiday, so volume was a lot lighter than normal. Of course the GDP miss also helped lower yields, but like I said, let’s see if we can hold below the 3.00% range. If we do hold below, then 2.80% looks like the next support level on the 5 year bond. If we get back about 3.0%, then the 3.34% range comes back into play as the ceiling.

Of course, as we near closer and closer to January 20th, markets will bounce around with every single announcement South of the border. As we draw closer to Trump 2.0 expect there to be some wild ideas thrown out that will impact yields, currencies, and central bank decisions. A low bond yield today might be a high bond yield in just a trading day or two, and of course, vice versa. The Canadian 5 year yield went from 3.29% down to 2.96% in 6 trading days. It could do that again, or turn around and head back up just as quickly.

For now things things to be settled and that is good heading into the last month of the year. Once we get the BOC meeting out of the way, we should have a pretty good idea where we go for the rest of 2024 and the start of 2025. It is supposed to be the most wonderful time of the year, but for Canadians who are struggling, unemployed, and claiming bankruptcy it certainly won’t be. Christmas usually has the tendency to raise bankruptcy filings heading into January, and 2025 could see records smashed. Or, I could be wrong and my vibe could just be off……..