10 Responses to “April 11, 2022”

1. ratchetrick says:

   April 12, 2022 at 2:57 pm

   It’s been a pretty decent day in the pref space today, with a pretty even balance between gainers and losers. Just before equity markets close today, however, I’m noticing widening spreads on traded prefs, and offer prices at or below last traded price on quite a few. Canadian prefs, (James, please correct me on this if you disagree . . .) but Canadian prefs usually trade more on American Central Bank moves than Canadian, but it would appear that the potential for a 50bp move tomorrow has a number of pref traders a bit spooked. The calming news would be that bond yields are for the most part down today, indicating acceptance of the BoC verdict tomorrow morning. Not sure how this one’s going to pan out . . . depends a lot on what “Tiff” says about future moves . . . any indication that he’s going to continue to be aggressive, especially if he moves 50 tomorrow . . . that could be a bit of a problem. If he chats with a little less venom, then it should be OK. We’ll see.

2. April 12, 2022 « PrefBlog says:

   April 12, 2022 at 8:49 pm

   […] and one of 50bp, which does not seem to indicate a similar level of conviction in the markets. As ratchetrick observes, we’ll see. But it seems that one way or another there will be […]

3. niagara says:

   April 12, 2022 at 10:34 pm

   I find the reaction of the bond market odd to an 8.5% CPI print in the US. The central banks have inflated this debt bubble for many years (not just a COVID reaction). A few rate hikes by the Fed and BoC are not going to magically bring inflation down – it will take a lot more than a few. Anything less than 50bp by the BoC at this meeting, at the next and the one after that is a joke. And they should keep going for the rest of this year. Put the economy into recession? perhaps, but this economic growth binge that we have been on globally post-GFC has been artificially juiced by ZIRP (NIRP in some countries), QE to infinity and beyond, etc….and let us not forget the drunken-sailor spending spree by governments. Inflation, if left unchecked, will be a collossal disaster, far beyond a short term recession.

4. ratchetrick says:

   April 13, 2022 at 9:52 am

   niagara, if the basic concept of “inflation” is “too much money chasing too few goods”, I’m not sure that madly raising rates is going to have the desired effect. Fuel and food are the main items contributing to inflation, both being affected by geopolitical factors that no one can control. People need to drive to work, and eat . . . so, making individual debt burdens more cumbersome will not curb spending in those areas; it will just exacerbate the already difficult cash flow situation for the average family. Raising rates makes sense in a debt heavy society, to discourage people from adding to their debt by overspending on unnecessary items. But there will be no effect on food and fuel, except by making those items more expensive as the suppliers try to cover off their own increased debt burdens. Central Banks seem to have only one tool in their toolbox . . . and I think they’ve forgotten how to use it. Just a few thoughts!

5. skeptical says:

   April 13, 2022 at 10:06 am

   Rising rates kill demand, just as falling rates bolster demand.
   Rising rates have already wiped out a good $10 trillion dollars from bond holders’ wealth. Hundreds of tech stocks have been massacred and the party has just gotten started. This is just the reverse wealth effect in action.

   All the ‘bond proxy’ tech stocks so cherished by Wall Street are going to get decimated, that are holding on so nicely. So far only bonds have been killed, but not bond proxies.

   Anyone holding perpetuals in their portfolio will have seen the pain. Fresh perpetuals issued last year selling fro 25.xx are down to 21.xx or below.

   Imagine rates rising by 300bps. It is going to destroy demand in everything- housing, stocks, luxury goods, apparel and even discretionary food and gas.

   If Central banks are serious about inflation, and it seems they are very serious right now, they’ll keep on raising rates till inflation is brought down to their target zone.
   All other things on their agenda will have to wait till inflation is destroyed.

   Remember, till about last fall, most of the Central Banks were ‘not even thinking about think about raising rates.’ And here we are, Bank of Canada already up by 75bps and at least 200 bps to go. Perhaps more.
   Unless things fall apart dramatically by fall and they have to pause/reverse. But we are very long way from there.

   Inflation is a societal malaise afflicting the poorest in the worst way. For the ‘privileged’ investors here, a 20% bump in food cost would be a rounding error. But for the poorest of the society, inflation is real pain and means making some bad trade offs.

6. ratchetrick says:

   April 13, 2022 at 10:36 am

   skeptical . . . back in the mid 80’s, interest rates were approaching 20%. Not 1% where they are today. Stock markets flourished, house prices were very strong . . . picking up steam with every rate hike. And . . . people with money . . . had it in Canada Savings Bonds and GICs and were able to live off the interest, and buy whatever they wanted. Rising rates actually have a beneficial effect on the wealthy, or at least those who aren’t debt burdened. For those who are debt burdened, they weren’t buying anything anyway. If anyone thinks house prices in Canada are going to subside on rate hikes, they’re dreaming in technicolour. Canadian housing is in demand not only by Canadians, but by buyers around the world, not the least of which is the USA . . . because Canada is a totally desirable place to live by comparison to just about anywhere else these days. And with our perpetual policy of keeping the Canadian dollar crazy low, anyone coming in gets an instant discount on their home currency . . . Americans, Brits, you name it (just not Russians or Asians lol). So rates rising from .5% to 3%? Big deal. I agree with everything you’ve said, except the part about rising rates destroying demand for things like housing, food and gas . . . not going to have that effect. Not a chance.

7. skeptical says:

   April 13, 2022 at 10:41 am

   ratchetrick, you are obviously more seasoned than I am. Respect your take. All Canadians- corporates, governments and individuals- are deeply indebted and the rate shock would be very painful.
   Back in the 1980s, we had a robust economy that made things and strong demographics. Now it’s immigration driven condo/real estate boom.
   With dept/gdp over 350%, it’s going to be a very painful adjustment.
   Rest, as they say, we’ll see. 🙂

8. ratchetrick says:

   April 13, 2022 at 1:22 pm

   skeptical, you make a very good point about the population demographics differences between “then & now”. Definitely a reality worth considering here. Another relevant distinction would be the post-Covid “work from home” culture, that appears to be here to stay (to some degree). Basically, a Toronto homeowner, for example . . . or someone who thought they needed to be a homeowner in Toronto for employment reasons, now has the option to move to the Kawarthas, or North Bay, or God knows where, and possibly maintain the downtown Toronto career. But that situation has been playing out in every region between Toronto and Montreal over the past two years, with the net result of “rural” or “lakefront” real estate rising in price exponentially, even when compared to the traditional real estate hotspots. Add the annoyance of air travel to foreign countries, or even the USA to the mix, and you’ve got a bullet proof reason to just get a cottage, or some kind of non urban modest place just about anywhere in Ontario. So mortgage rates will rise by 2 or 3 percent over the next year or so. “No bid deal” in the overall scheme of things. Just some thoughts!

9. niagara says:

   April 13, 2022 at 3:57 pm

   ratchetrick, the food and energy components of CPI has long been ignored by central bankers and economists – dismissed as being volatile. But increases in these items have a huge impact on the average worker. Given the tight labour markets in the US and Canada, this gives employees significant leverage in demanding higher compensation…which companies will then pass on (as much as possible) to its customers – wage push inflation, which I dont think that we have seen in many years.

   Also, the core CPI in the US was up 6.5% year over year, indicating that it is more than just food and energy driving the headline CPI.

   Finally, I think that mortgage rates going 2-3% higher is a big deal. eg someone with an $800k mortgage would see a monthly increase in mortgage payments of nearly $1100 for a 250bp rise in rates. I don’t think that many families could come up with that kind of extra $$ from their after-tax income, especially as many have stretched themselves to the limit just to get into the home they are in. Or course, many will be locked into longer term mortgages but renewals will eventually put the bite on them.

10. ratchetrick says:

    April 14, 2022 at 7:25 am

    Hi niagara . . . everything you’ve listed there is quite bang on. To sum it all up then, an aggressive rate hike cycle is bad for businesses, bad for individual families, and ultimately bad for the economy in general. Need to clarify the “no big deal” comment I made previously. You’re absolutely right that a family with any kind of material mortgage will feel the sting of 2 or 3 percentage points . . . I believe however, for all the reasons I listed earlier, that raising rates as it appears we’re well into will have no noticeable effect on demand for real estate. If anything, it will probably cause additional “overheating” as people scamper to get into the market while they still can. Going back to the mid 80’s situation with interest rates approaching 20%, people were camping out overnight in front of subdivision sales offices to be first in line to buy a property. Interest was literally on fire. Those rates had no cooling impact on demand . . . so, here we are looking at 3, maybe 4% rates . . . as I said before, “No big deal”. Get ready for the real estate stampede to gain momentum this spring.