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Is it me?

| May 13, 2024

Last week I discussed our view that the economy is getting a bit softer and that the data we’ve been seeing over the last few months has not been as strong as it might appear on the surface.

Last week’s initial jobless claims number was another soft number.  It came in at 231,000 versus an expected number of 215,000. That is the highest in 8 months.

Don’t get me wrong. I’m not saying the sky is falling, just merely pointing out that the numbers we are seeing are indeed starting to soften. Assuming they continue, it would give the FED cover to cut interest rates. Speaking of cutting interest rates, it looks like the market is suggesting a 60% chance of a rate cut in Canada in June. Does this presage some “trickle down economic policy” making its way to the US?

Remember, a couple weeks ago I said that the US can’t operate their monetary system in a vacuum and other countries (through their currencies) will have some influence on FED policy. Here is a perfect example. If Canada cuts rates, it will make Canadian goods cheaper in the US, because all things being equal, the Canadian dollar should go down relative to the US dollar. On the flip side, that makes US goods more expensive in Canada. Now, one 25 basis point cut (0.25%) is not likely to do much of anything, but policies can’t get too far out of whack.

Last week the Bank of Canada released its annual ‘Financial Stability Report.’ You can read it in its entirety here.

I won’t bore you with the entire report, but there are some interesting things in the report that are not unique to Canada. Here are the highlights.

Much like the United States, it appears that many consumers don’t have adequate savings in case something happens. The chart below shows that renters have less savings than homeowners and homeowners that don’t have a mortgage (home paid off) have more savings than those that do have a mortgage. Go figure. But renters on average have less than one (1) month of savings. Our recommendation has always been to have at least 3 to 6 months of savings.

It makes sense that those without mortgages have more liquid savings, but here is a disturbing statistic. Those same households that have no mortgages also are carrying more credit card debt than they have since prior to COVID. 45% of those households carry credit card balances. Of those, almost a quarter of them are 80% or more maxed out.

Meanwhile, those credit cards are charging between up to 20%-25% interest. So, it’s no surprise that delinquencies are rising, even with those without mortgages.

Unlike the US, Canada doesn’t generally have 30-year fixed mortgages. They are usually fixed for five (5) years and then adjust.

 

In the US of course, we have a slightly different problem. Almost 40% of homeowners don’t have a mortgage. Of those with mortgages, almost 60% have an interest rate below 4%. And there lies the problem. About three quarters of the houses either are owned outright or have a mortgage below 4%. That makes it very difficult for many of those people to sell their house and buy something with a potentially higher interest rate than what they currently have.

Then you get headlines like this.

The Bank of Canada said this.

Let me say two things about that.

  1. This is always a possibility and when everyone tries for the exits at the same time, things get messy.
  2. The global central banks have created this problem by keeping interest rates near zero for far too long, and then flooding the global economy with massive liquidity, which then caused inflation.

While they recognize the risk, they don’t raise their hand to take blame for the situation. The longer interest rates are held high, and financial stress and inflation erode buying power, the more acute this problem becomes. They know this, but they also know if they cut rates that could further spur inflation and if they don’t, they could risk another financial crisis.

But don’t worry, they will come in after the fact and take credit for cleaning up the mess. The best thing we all can do is maintain modest leverage (fixed where possible) and have our emergency fund adequately stocked. Financial planning is a key tool for that.

We will see the April CPI on Wednesday and Leading Economic Indicators (LEI) on Friday. That’s it for this week, I hope you have a good week. Reach out with questions or comments.

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