1994

It was 30 years ago, 1994. 30 years seems like a long time, doesn’t it? Pre internet mass adoption, pre cell phone, and pre apps. Some might think I made a typo and meant to type 1984, but it is 1994 I really want to point out.

It should come as no surprise that Canada finds itself in a bit of a conundrum right now. Rates are high, real estate is sucking wind, unemployment is creeping up, inflation, while muted is heading the wrong way, GDP per capita is on a 6 quarter slide down, the currency is falling off like my grades in high school ,and in case that wasn’t enough, there is now some cage rattling going on from the South. In fact, it is so bad that Canada now ranks behind some of the poorest US states when looking at economic numbers. Canada has a lower GDP per capita than West Virginia, and an average household income lower than Mississippi….Yep, that Mississippi.

The good news is that Canada has found itself in a similar situation before, and can actually pull out of this slump. Of course I could also lose weight, eat better, and give more to charity. The problem here is the will to do it. I have noted before that there seems to be no political will in Canada to fix what is broken. I have seen this on display more so in the last 12 months than ever before – the politicians just don’t seem to give a shit about fixing the problems. The current administration is busy reupholstering the seats in the Buick while the fucking wheels are falling off. This too has happened before.

Enter 1994. Leading into 1994 Canada was in tough shape. Rates were high, real estate was still not recovered from the late 80’s crash, debt was spiraling out of control ( see any parallels yet? ) debt was 68% of GDP, the rating agencies had downgraded Canadian debt, and the term the Canadian Peso was born. It was so bad that the Associate Deputy Finance Minister Scott Clarke was quoted as saying ” We used to thank God for Italy otherwise we would have ranked dead last in the G7″. It was bad. Canada had lost its way, and it seemed that there was no righting the ship. But, just when you think things cannot get worse – they always do. I have long held the belief, and stop me if you have heard it before – ” It always gets worse before it gets better “.

Well, it got a lot worse in 1994, and that is exactly what led to it getting better. Somehow the worse it got, the better and faster it made the turnaround. But, as is always the case, there has to be a defining moment. A moment whereby there is no point of return. A burn the bridge moment if you will. 1994 delivered just that in the most random way.

As many of you may know, and some of you may not know, governments must sell their debt in the market. Primary dealers buy the bonds, and then re distribute them. I am over simplifying the process here for ease, but every bond the government creates – it must then sell to someone. Selling something to someone requires someone to want to purchase said item. Well, in 1994 that someone disappeared. At a bond auction in mid 1994 with less than 30 minutes left in the government long bond auction there was no bids for the bonds!!! Absolutely no one wanted to own Canadian government debt. It was risky, it was lower rated, and Canada had no prospects of financial growth. To have no bids in a government bond auction is a fucking problem. Just for some reference, in the US bond auction they are usually subscribed about 2.5 to 1, meaning there is $2.50 in bids for every dollar of bond available. If the ratio falls below about 2.2 to 1, people get nervous. So imagine how nervous the Canadian government got in 1994 when the ratio was 0 to 1??? That moment came to define the Chretien governments war on debt. That was, as they say, the ” defining moment”. No one bidding on your debt means absolutely no one has any faith in your entire country. It is a bit of a kick to the nuts – economically speaking.

So, why am I rambling on about some stupid government bond auction 30 years ago? I can see people already asking ” How does this affect me?”. Well, I am going to tell you.

You see, the only way the government of Canada ( or the 51st state, I am not really sure what we are calling it these days ) was able to pull out any bids in the last few minutes of the auction was they had to somehow make the bonds appeal to investors. In real estate you may have a shit box of a house, but if you price it cheap, someone will bite. If the price is right, then someone will take a flyer and figure it is worth the risk. Well, that is how the government got some bids – they lowered bond prices at the auction ( not directly, but indirectly there is a mechanism for changing pricing through yields ) Now, the problem is that as you lower the price of the bond, the interest rate, or more appropriately, the yield on the bond goes up.

As Canada looks to have a deficit this year that was not supposed to be a penny over 40B, we are now learning it could be closer to 62B. That means the government is going to have to sell more debt. More supply means the price goes down on the bonds. Lower bond prices mean higher interest rates, and of course we all know that a good portion of mortgage rates are based off the bond. You could basically see a shitty economy that makes people think rates will go down – when in fact the opposite could happen. Perhaps a shit economy leads to higher interest rates this time around? Now, I am sure there is a Tik Tok dancer that will disagree with my assessment, and I am fine with that. I know they are out there cause I see all their posts, and get all their emails daily.

2.5 years ago I gave a speech and I said that Canada was in for a tough 5 to 10 year slog. Slower growth, higher inflation, higher unemployment, and just mired in the mud. 2.5 years in and we are right where I figured we would be. High housing prices from 2012 to 2021 are going to be a boat anchor on growth for a long time to come. The good news is that if we do decide to get serious about the economy, it can be turned around just like the power team of Chretien and Martin did. It took them a good solid 8 to 10 years, but they brought Canada’s books back to being a world class example. It took a lot of austerity, it took a lot of cuts, and it took some small tax increases, but they were able to make Canada an example of fiscal prudence. I am not exactly sure what it will take for our current government to see the light, so to speak, but I hope it happens soon. What will be the ‘ come to Jesus ‘ moment? Will it take a failed bond auction? Maybe. Will it take a DJT administration tariffing Canada into poverty? I hope not. But at some point we need to have that defining moment of this century like we did in the 90’s to get Canada back on track.

While we wait for this moment to occur, don’t bank on lower rates. While all the signs suggest that rates should go lower due to Canadian economics, remember that in 2024 we are far more globalized than previous decades. The money that Canada needs to cover deficits comes from abroad, and with a currency already on the decline, with more declines likely, it is going to be harder and harder to attract foreign capital. A lot of people will rightly point out that a declining dollar makes it easier to export, and this will turn the economy around. The problem is that when your currency is losing 5% a year ( 5.02% YTD to be exact ) that causes a problem for foreign investors. I really want to run this example to show you. If you were an investor outside of Canada and bought a 5 year bond on Jan 02 2024 you would have earned a yield of approx. 3.25%. However, if the currency lost lost 5.02%, that means the foreign investor lost 1.77% to hold that bond for the year – before even factoring in inflation. Add another 2% to 2.5% in lost purchasing power, and now the investor is really behind the 8 ball. No one invests to lose money. This is why I heavily focus on currency moves in a mortgage blog – it matters since foreign capital is not likely to buy your debt if the currency will devalue.

There is a lot of big money books pegging the CAD to lose another 4-5% in 2025 against the USD, so that would cause another year of losses for bond investors, unless of course rates went up to offset those potential currency losses. You see how this all works now? Now, if Canada had it’s come to Jesus moment and cleared up the deficit for the year, which would cause the CAD to rebound, then holy hell, we could be away to the races. Sadly, I do not think the current administration thinks that much about economics.

My supreme hope is that 30 years from now I can write about 2024 the same way I just wrote about 1994. I really hope we have that moment where we start taking finance serious as a country. If we don’t, someone else may very well do it for us, and it won’t be the desired outcome – or maybe it will be the desired outcome, and it will be the moment that made us change course. Either way, we will know in 30 years.