Not there yet

Friday update. Buckle up.

The cost of money.
Mortgage brokers say the banks are swinging the hammer. Five-year rates will increase to between 2.2% and 2.44%. No big surprise, given the spike in bond yields lately (we showed you the chart two days ago). So, VRMs remain the best deal – at least for a year or so.

But here’s the worry: mortgage volumes exploded by more than 40% year/year in the first half of 2021. Even scarier, the biggest debt swallowers are those with the least financial history – kiddos. The GenZ gang. Mortgage applications from them have doubled. Clearly the newbie buyers are banking on the big price gins of the past five years continuing, to paper over their borrowing binge.

Maybe it’ll happen. Um, maybe not. But the reality is all these folks will have to renew their loans at some point within the next 60 months Rest assured it will not be at 2%. As yammered about here yesterday, inflation is igniting. Wow, look at oil today. Five bucks more than 24 hours ago. Gold is tanking. BTC gamblers are going nuts. Puppies are on sale. What a messed-up world.

High inflation will bring higher rates. As the labour market tightens, wage demands will ensure it. Average families cannot afford average houses, while food and basic essentials are spiraling. Workers at John Deere in the US just figured out that a busted supply chain is their best friend. They’re on strike for a sizeable wage gain, which is likely to be offered. It’s turning into a bad time to be a boss. Employees are so irritating.

So the bond market says six or seven Bank of Canada increases are coming within the next 36 months, adding about 1.5% to existing rates. The prime and HELOCs will be circa 4%, VRMs will clock in at 3.5% and fixed fivers north of that. That will sure makes a difference if you just borrowed $1.4 million to buy a so-so house in the GTA for $2.2 million, after putting almost a million down.

Gulp.

The markets.
Mr. Market went on a tear this week after a few losing sessions. Gone are worries about the supply chain, China, inflation, corporate revenues, Biden’s big-tax agenda, Covid or the S&P at 36 times earnings. It’s the reopening trade, baby. Only 30% of the world has been vaxed, and investors figure the post-pandemic recovery will keep giving for years more.

It’s Q3 earnings season now and Goldman’s profits were squid-sized ginormous. The betting is that oversized demand for goods – houses, appliances, EVs, lumber, electronics – that the virus brought to North America will be replaced with an even bigger appetite for services as Delta retreats. As mentioned here yesterday, the service sector accounted for 70% of the US economy and 60% of Canada’s GDP pre-Covid. Then it collapsed. Now it’s coming back. The sight of 18,000 screaming hockey fans in Toronto the other night is visual proof.

The pandemic is over in Mr. Market’s mind. If you think the Dow at 35,000 is a nosebleed, break out the oxygen. Call the Sherpas! We’re going up.

T2 & the Freelanders
Ten more sleeps until Mr. Socks unveils his new federal cabinet. We know Chrystia will be our non-financial finance minister. We know ministers will be picked carefully by gender, geography and diversity. And we know there will be roughly $80 billion in additional federal spending in the next fiscal year.

Parliament will be recalled in the third week of November. Then a Throne Speech. Then a holiday break. Then the budget. And more taxes.

Blog dog Jesse has a question:

If there is indeed an increase to the cap gains inclusion rate announced early next year, how soon would that go into effect? And thus when would be the optimal time to try and realize any cap gains?

An increase in the capital gains inclusion rate is widely expected by the Street and accountants everywhere. It’s something the NDP has been pushing, and the Libs are philosophically aligned with. Currently half of a gain is tax-free and the rest is added to taxable income. That’s meant the highest rate (for people making $250,000 or more in a single year) has been 26%. So earning in the form of capital gains has been an investment pillar.

What’s likely? Maybe 60%. Or 75% as the new inclusion rate. The actual amount of additional revenue raised by the feds would be modest, since the top 10% of tax filers (by income) account for 70% of the tax raised this way – and because investors can just decide not to crystallize gains.

But it’s the kind of eat-the-rich symbolism that politicians love.

The answer, Jesse: the change would be effective on the day of the budget. Now, never make an investment decision based solely on the potential of a tax change. Instead, act in the pursuit of your goals. But if you plan on cashing in some chips anyway, the next 70 days might be a wise choice.

About the picture: “Please find attached a picture of our fur children,” writes Tim, from Hamilton. “On the left is Henry, a 2 year old Lab / Border Collie mix (so we were told).  On the right is Sophie, an 8 year old St. Bernard / Beagle mix (again so we were told). Thanks again for all of your help over the years.”