Details Matter

There have been a lot of numbers come out over the last few days, and while I see a lot of people celebrating, I think a lot of the celebrations are a bit mis placed. Let’s look at some great examples:

1. This morning the BOC announced that they would be trimming the bank rate by 25 bps, and it took less than a millisecond for every mortgage related person in the country to post it on Facebook. The realtors of course were warming up and doing stretches around 7 am so they were good and limber to Tik Tok dance the day away. While everyone was busy updating to Instagram and Twitter, most people seem to have missed the commentary from Uncle Tiff. Had those people stuck around they would have heard the BOC say that GDP for Q3 in Canada came in at 1.0%, but government spending accounted for 1,3% of it. So……if I did my math right, it means without government spending, GDP would have contracted by .3% for Q3. I shouldn’t have to say this, but I feel it is almost required at this point – government doesn’t have money, they simply have your tax dollars. They spend and they spend and they spend, but it isn’t their money. The reason this matter is that I have heard a lot of politicians spouting off about how strong the Canadian economy is, and how they can weather the storms of potential tariffs, but the actual math and data says differently. Basically every private business and citizen that spent money in Q3 still couldn’t get GDP to grow, and that was before tariffs. Also in the presser today, the BOC announced the end of quantitative tightening for 2025 ( QT ). It may be a good thing, because they may need to go into quantitative easing ( QE ) quickly if DJT is serious about his tariff threat. For the record, almost every time a central bank announces the end of any type of QT, there is a need to bring in QE within about 6 months. While the BOC expects QT to end in September ( when a large COG band falls off the balance sheet ) , they will re start balance sheet normalization prior to Sept to cover off that large GOC bond maturity. The last central bank to end QT was the US Fed, and that happened in November 2019. Something tells me by March of the following year, something happened….. Details matter.
2. Since we are talking about rate cuts, lets also explore if rates have actually gone down, shall we? Everyone knew in 2024 rates would drop, and on the variable they sure did, but the fixed rates didn’t really budge all that much. But after todays 25 bp reduction, everyone was busy jumping for joy, but instead of partying like it is 1999, we should be hitting the history books. Some short history suggest that VRM rates are not cheaper now than they were 90 days ago really. One of our channel lenders ( I will leave them nameless ) offered a variable rate on Dec 03, 2024 at a rate of Prime -.85%. Today that same lender offers a variable at Prime -.65%. So, whoopy do, Prime came down 25 bps, but lenders swallowed back 20 of it by reducing the discount. So yes, rates are technically lower, but 5 bps is a rounding error on a mortgage payment. And yes, I understand that existing mortgage holders got the full drop, but variable mortgage for the last 2 years were a small slice of the market ( less than 5% by most accounts ) so existing variable holders aren’t really the factor here. How many clients are wanting a variable now ‘ thinking ‘ they are getting a much lower rate? This is typical for banks to do to protect their margins in an environment when overnight rates tend to drop. A little study of longer term history would also tell you that when the BOC has swiftly cut rates, the economy shits the bed 11 out of 10 times. When Uncle Tiff’s predecessor, none other than the man running to be PM was forced to cut rates quickly, the aftermath was not pretty. Rate cuts are like a shot of morphine – they make you feel good temporarily, but the hangover can be a real bitch. Again, details matter.
3. And while we are on drugs, lets look at a little banter that we see going on over the Canada US border right now? It seems a lot of people have their nose out of joint about some potential tariffs coming on Feb 01. It appears that much of the tariffs could be avoided by reducing fentanyl shipments from Canada into the US. Now, this is where I have never seen a story take on a life of its own more than I have relating to this topic. The story goes that over 300,000 KG’s of drugs were seized at the Mexico / US border in 2023 ( the last year data is available ), while only around 32,000 KG’s of drugs were seized at the Canada / US border for the same time frame. The argument from the North is that Mexico is a bigger problem than Canada. I get that. But, and here is where it really matters: The United States did not say Canada had to stop DRUG shipments, but they specifically pointed out fentanyl shipments. Most of the drugs that came in the Southern border were of the leafy green variety, and while still against US Federal law, it is not as much of a concern as the fentanyl. An outsized amount of the fentanyl trafficked into the US comes through the Northern border. Now, I did not say Canada was responsible for that, but it does come from the territory. A lot of Chinese sellers are using Canada as a conduit to get fentanyl into the US. So, yes, more drugs come from Mexico, but the highly addictive, easy to overdose drugs that can kill you are being shipped through the North. I don’t know of anyone that smoked pot until they died, but I constantly see about people overdosing on opioids. Now, I don’t say this to have my countrymen mad with me, just to point out the facts here. When emotion gets involved, and we start drawing lines in the sand, and start trade wars – no one wins. Details make all the difference here, and we need to start paying attention to them.
4. And, since I am batting a thousand already, lets look at some potential outcomes for tariffs hitting Canada. It would appear that as of Saturday, Canada needs to ready itself for tariffs from DJT. Canadian politicians have been running around trying to figure out how to deal with the issue ( rather than doing things like, oh, I don’t know, securing the border ) . I will admit, I don’t like any of the plans I have heard thus far. There is a lot of talk about a COVID style / CERB payment system to help individuals and businesses affected by the tariffs. In the financial world we like to call this ‘helicopter money’. Back during the GFR in the US, then Fed Chairman Ben Bernanke suggested that in order to deal with deflation, the US would drop money from helicopters to stimulate the economy. The term kind of stuck. Canada has enough going wrong with the economy, the last thing it needs is to start giving out money like candy. The last time we did that, we saw inflation go from 1.6% all the way up to damn near 9%. Free money has a way of stoking inflationary fires, and with the CAD already looking to head lower, unleashing massive stimulus into the economy is bound to spike inflation, while at the same time dropping the CAD, that will help to spike inflation, and round and round we go. To pile onto this, at the US Fed meeting today, Jerome and Co. held the overnight rate, and the presser was pretty hawkish for potential rate increases later on in the year. They certainly didn’t give cutting rates further a whole lot of runway, although they did stop short of saying hikes were in the cards. Either way, the gap between Tiff and Jerome just got another 25 bps wider. How wide does that gap get before the currency breaks down? The reason I put this out there, is that how the government responds to tariffs, and the next steps will be critical for the Canadian economy. You could say that the details will matter.