6 Responses to “May 18, 2022”

1. ratchetrick says:

   May 19, 2022 at 7:06 am

   As James points out, inflation continues to be a mess . . . with food & fuel the two main culprits, after housing. Jerome, in a speech yesterday echoed the same basic storyline. I don’t think there’s anyone out there who isn’t now totally familiar with this issue . . . so . . . can anyone please explain how rapidly raising the bank rate will solve this problem? People have to eat, and have to drive to work. Companies have to operate. Raising interest rates simply causes all businesses (which all have debt to service) to raise prices to offset the increased financing costs. This, in turn, creates inflation, doesn’t it? And what does raising rates do to help alleviate the supply chain issue? Nothing.

   I’m sorry, but it really, really looks like the central banks of the world, especially our own over here . . . have it totally wrong. They’re only confirming that only one tool exists in their toolbox . . . and they have this notion that it’s the only tool that’s ever needed. They need to really get out of this mindset, and find some new tools.

   If you want to drill a hole, get a drill, leave the screwdriver in the toolbox for another time.

2. stusclues says:

   May 19, 2022 at 9:13 am

   “And what does raising rates do to help alleviate the supply chain issue?”

   You’re right that it is a blunt tool. However, it doesn’t “simply” cause businesses to raise prices. In some cases, it bites margins which further lets air out of the balloon of high asset prices as future earnings go down.

   Also, it is not just raising rates, but the threat of rising rates that is doing much of the work. Recent rate increases and the threat of more are deflating bubble assets and taking the heat out of housing. On the latter, fewer housing sales (and lower prices leaving owners feeling poorer) reduce demand across the housing spectrum (a big chunk of Cdn GDP, to our shame) for everything from appliances to DIY materials – this will have an impact on the supply chain issues. On the former, deflating bubble assets will have a reverse wealth effect – also dampening demand and easing supply chain issues.

3. ratchetrick says:

   May 19, 2022 at 11:44 am

   Stusclues . . . you should be aware that the only reversal in housing prices so far have been noticed in a few of the higher density markets that have experienced the highest increased valuations. Toronto, etc. But you should be aware that the first tranche of real estate “owners” to head to the exits are not prospective home buyers . . . they’re actually professional investors and real estate agents who have been “inventorying” property for re`sale. It’s not uncommon for a real estate agency to go into a condo development in Toronto or KW, or any similar metro area, and buy up an entire floor of the building. Then resell at their discretion. Rates rising squeezes these people, and the selling motivation heats up.

   The next tranche of home buyer would be the ones that have gone in with a minimal down payment, and barely enough salary to cover mortgage payments. Rate hikes immediately squeeze these people, forcing them to exit.

   Both of these buying “groups” shouldn’t be there anyway, so if rate hikes push them out . . . it’s a good thing. But make no mistake; for the legitimate home buyer that’s purchased a property to be a home, and are financed intelligently . . . that property will not become a “bubble” asset as you call it. Price points have been established over the last few years, and these will not deteriorate.

   The other issue is the post-Covid “work from home” situation that’s now become a very permanent part of the landscape. Want a job in downtown Toronto? but want to live on a lakefront property? No problem . . . as long as there’s internet available. Think pricing out there is on it’s way down due to rate hikes? Forget it.

   There is no “bubble asset” effect going on outside of the manipulated markets I’ve described above. And I don’t expect there will be. A 4% mortgage being commuted to a 6 or 7% situation is literally immaterial, and still pales in comparison to traditional rates that hovered even higher than that.

   Housing is not a “bubble asset”. It is one of the only legitimate assets left to invest in . . . just a few thoughts!

4. stusclues says:

   May 19, 2022 at 12:10 pm

   I meant “Bubble Assets” in a broader sense: crypto, tech stocks (and other stocks priced for future profits), housing (respectfully disagree with your analysis) to name a few. NASDAQ is down 28% YTD – that definitely has a wealth effect.

5. ratchetrick says:

   May 19, 2022 at 12:31 pm

   Yea, I’m not disagreeing with you outright. You’ve made some very good points. The wealth effect of the market situation is very real . . . no question. You’re also very right about the threat of rising rates doing damage. I think the world would be a better place if central bankers were not allowed to open their mouths at any time between meetings lol! You’re also very astute to recognize that rate hikes, as a tool, is very “blunt”. Thank you for endorsing that seldom recognized reality.

   I think everyone needs to understand however, that businesses big or small, typically are debt based. Very few enterprises are debt free; as such, interest rates are a cost of doing business, and as they head up, whatever product or service a company provides, must head up as well to offset those new costs. If that isn’t enough, rising rates directly affects the costs of any company’s raw materials . . . hence, these costs need to be offset as well.

   Bottom line imo is this: rising interest rates result in upward prices of all goods and services, and for this reason rate hikes are inflationary. The central banks, at least right now . . . have this one dead wrong. The current inflation issue is not a “demand” side issue, as much as it is a “supply” side issue. Since rate hikes only affect the demand side, . . . there will be no meaningful correction to high inflation as a result. (But once the supply chain fiasco situation subsides, so will inflation, and all the Central Bankers will be right there to boast about how their rate hike mania saved the day!)

6. May 25, 2022 « PrefBlog says:

   May 25, 2022 at 9:01 pm

   […] PerpetualDiscounts now yield 5.84%, equivalent to 7.59% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.97%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 260bp from the 270bp reported May 18. […]