Brace yourself

Ah yes. Here we go.

Two days ago T2 gave his top two priorities for the third Socks Dynasty. First, the climate emergency. Second, reconciliation.

If you think either of those will come without massive new spending, atop a historic deficit and eye-watering debt, you’re naïve. The Covid gush may pale in comparison to what staggers back from the land of Scotch (by the way my grandmother was a Dewar – but sadly from the sober, penurious side of the family). Remember. Our new enviro minister once hung a ‘CLIMATE KILLER’ banner from the top of the CN Tower. It takes a unique person to consider such a thing.

These two top federal agenda items also send out this drumbeat: more tax.

Then the Bank of Canada admitted inflation is outta control; that it must quickly throttle back stimulus spending; and interest rates are going up a whole lot sooner than it said a couple of months ago. Immediately bond yields spiked. Mortgage rates will likely rise again in a week or so. The third time in a month.

Now we get this: “Starbucks Canada says it’s raising wages and benefits amid “critical staffing shortages” and a renewed commitment to the well-being of its workers.”

Beginning in January, the company says its starting wages will be increased to a dollar above provincial minimums, while workers who have been with the company a year will receive a six to 10 per cent pay hike. It says the wage boost, which will impact about 20,000 workers, will bring the hourly pay for baristas to between $13 and $20.45, depending on location and tenure, while shift supervisors will earn between $15.85 and $24.95.

Starbucks also says it’s providing every hourly worker in Canada with three paid shifts off per calendar year for sick days or family care, along with ongoing perks such as free coffee, a subscription to a meditation app and health and dental care. The higher wages and benefits come as the coffee company says it has added recruiting specialists to address “critical staffing shortages and difficulties” in some markets.

Admittedly this is but one company, yet an important and influential one. The move comes a few days after the news that 157,000 new jobs were created in September – a huge number – and we’re back to BeforeTimes employment levels. Our jobless rate has dropped by half from little more than a year ago. GDP growth in 2021 will be 5%. The stock market has added 30%. Houses are out of control. Natural gas prices just went up 8%. And here is irrefutable proof – from a notoriously low-wage part of the economy – that wage pressures are real.

This is what structural inflation is made of. When people expect prices to keep rising, they do. They ask for higher incomes. They accelerate buying intentions (it’s already Christmas). They save less. In an economy like ours, 60% determined by consumer spending, it’s all about the price of strawberries, bungalows, insurance premiums, gasoline and Canada Goose coats. Plus those ridiculous Starbucks drinks.

The conclusions:

• Mortgage rates will continue to rise until they have doubled from current level. This may take a year or more, but plan on that outcome when contemplating renewal. You will be wise to throw more money at the principal.
• Interest-bearing deposits and savings vehicles are soon to receive the first transfusions in more than two years. So don’t lock into a five-year GIC. In fact, shun any non-cashable liquid or near-cash investment. Rates of return will more than double.
• Completely ignore those who tell you the cost of money ‘cannot’ rise by much or that it will fall back quickly. The rate-increase period will be lengthy (at least two years) and involve a minimum of eight to ten hikes. This will be in line with past CB actions. The enemy now is inflation. Nobody cares that you borrowed too much.
• Rising rates will hurt real estate, obviously. Purchasing power falls quickly as monetary policy changes. The rate increases will initially spur more activity, followed by a slump. If you’re buying, wait.
• No, stock markets will not crash as the cost of money increases. Inflation comes with economic growth, post-pandemic reopening, supply chain issues, exploding consumer demand and increased profits. Over 80% of companies currently reporting earnings have sailed past expectations. History shows us markets do just fine during periods of escalating interest.
• It’s a bad time to have variable-rate debt, like HELOCs, personal lines of credit or VR mortgages.
• It’s a great time to own preferred shares, which increase in capital value (the rate reset kind) as interest rates augment, while paying a tax-advantaged income stream. Get an ETF with a basket of quality prefs.
• Been considering commuting a pension? Then know the value will fall with every interest rate increase, whether from the CB or the bond market. Waiting until next year could end up being a costly decision.
• And remember that the Socks Dynasty, being fixated on social engineering, climate fear and unbridled spending, will just make inflation worse with increased taxation. Your best friends will be the TFSA, the RRSP, a RRIF, your kids’ RESP or that weird new FHSA. Fill ‘em up with diversified, low-cost, liquid ETFs and ensure you have enough balance to withstand the inevitable whipsawing of equity markets as valuations wobble higher.

Now, time for a dram. The show begins.

About the picture: “I thought I would share a picture of Red, our beautiful 7-year old Chihuahua that we rescued from Texas,” writes Michael. “He is adapting well to life in Ontario, though this will be his first full Canadian winter. I thought this would be a great pic to  pair nicely with your recent articles on inflation and the coming mortgage hikes. Thanks so much. I continue to read daily and appreciate the wisdom, and caution, that you provide.”