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Hard to ignore

Tuesday, October 11, 2016 16:42
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This, trust me, is the last time (this week) the word ‘Trump’ will stain this pathetic blog. But let’s go with the adjective. Trumpian. That makes more sense. It ain’t actually about the guy, more about what it is he’s tapped into – and what difference that will have on investing. After all, we don’t care about social justice or systemic equality here. We just wanna be wealthy.

There are two big trends in the world to recognize. And harness.

First, this is the bottom of the interest rate cycle. With many central banks and bond yields negative around the world, with the Royal Bank willing to give you a home loan at 2.09%, with people drooling over 1.5% ‘high-interest’ accounts and retirees buying crap investments (like pooled mortgage funds) desperate for yield, the writing’s on the wall. There is no more to come. The Bank of Canada is highly unlikely to cut again (the next ate move would be next Wednesday), as are other major central bankers around the world.

In fact the odds of a US increase by the Fed on December 14th grew to 70% on Tuesday. As a result, the sell-off in American government bonds increased as prices dropped and yields increased. Wall Street shed 200 points in anticipation of the punch bowl being taken away from the party, and the US currency bumped higher, taking our dollarette lower. Pacific Investment Management forecast two, and likely three, Fed increases by this time next year.

So the cost of money will rise. Slowly but relentlessly. There is nothing below us. The implications for the Canadian real estate market – already sucker-punched by Wild Bill Morneau last Monday – are legion.

By the way, the Trumpian response to low rates has been to insist they be raised. Fed boss Janet Yellen has even been accused of not having the balls to do so. Imagine that.

The other big trend is what propelled Brexit and created The Donald. The anti-globalism movement is gaining momentum, and will not go away until there are palpable consequences. Middle-class voters on both sides of the Atlantic are angry at the job exodus, outsourcing and the loss of a quality of life they believed was their birthright. The Trumpian objects of this anger are China, Mexicans, multinational CEOs, Wall Streeters, 1%ers, free-trading politicians and immigrant workers, to name a few.

Whatever the outcome of the November 8th slugfest (like it’s even in doubt) you can bet on a world that’s more protectionist, less global and more nationalistic. In practical terms that means higher wages, higher prices, more inflation and increasing commodity prices. All of those things, in turn, feed interest rates and allow central banks to wean off the cheap money narcotic.

None of this happens overnight. But it’s all coming.

Among the implications: fixed-income assets will probably get cheaper as prices drop and yields increase. It’s perfectly okay to have bonds in your portfolio to reduce volatility, but ensure they have short duration (close to maturity) to minimize the impact. As rates creep higher, first in the US in less than 10 weeks, then in the bond market and later in 2017 in Canada, some assets will benefit mightily. Like rate-reset preferreds. They’re on sale now and still pay a 5% yield with a tax credit. That’s like free sprinkles.

Higher inflation, wage increases and growing commodity prices will actually be good for the Canadian economy. So you might want to pay more attention to Maple over the next year or two. And prepare for increased turbulence on markets, as changes like these never come smoothly. Stocks could drop into correction territory (a 10% decline) between now and the end of the year, which should end up being a nice little buying opportunity. Of course the Nobel-winning macroeconomists who live in this blog’s comment section with the Moms will tell you it’s the end of America, but ignore ‘em.

There is no US recession on the horizon. No Donald, either. But the Trumpian days are just dawning.


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