The done deal

For the first time, yesterday, the S&P 500 crossed a key barrier. Then higher today. The Dow also hit a record. So did the Nasdaq. Even Bay Street is ripping a new one. Bond prices are also up. Balanced portfolios have been swelling. And investors are feeling just as smug as yesterday’s comments section was morose.

In fact, the contrast is epic. Rarely has this blog attracted such an angry, emotional, vitriolic and visceral clot of malformed opinion as yesterday. Vilifying everyone who owns a rental property – out of hate and jealousy – underscores a generational divide which will undoubtedly rock politics. And not necessarily for the better. There is a class of non-house-owning people ready to do whatever damage they can inflict on others since their expectations have not been met.

Alas, things are about to get worse for them.

Interest rates are coming down. It’s official now. There will be three cuts in 2024 in both Canada and the States. CBs will tap the accelerator staring (probably) in June in order to keep these nations out of recession, to promote job growth and an expanding GDP plus ease up on credit so the consumer-fed economies won’t starve.

Bond yields have dropped as a result. Stocks have romped higher. GIC rates are already edging lower. Mortgage rates will be trimmed. And the inverse relationship between loan costs and house prices will again be evident.

There are some things this blog told you that the angry folk have dismissed. To their detriment.

We told you rates would decline this year. They will. The drop will be at least three-quarters of a point in the US. Maybe 1% here, depending on the data.

We told you real estate sales levels would rise this spring. That’s happening. March stats will confirm this in the next fourteen days.

We told you the low point for house prices in major markets was January of 2023. Thus far, that’s true. And with lower mortgage rates on the horizon, there is scant reason to anticipate a market collapse. Especially now that the Fed and the Bank of Canada are making it clear avoiding recession is equal to – if not more important than – crushing inflation.

Recall that our CB has two mandates. Price stability. And full employment. Currently an inflation rate of 2.8% is within the bank’s target range and has behaved better than expected. We can live with that, Tiff suggests. The unemployment rate of 5.7%, however, is too high. It does not meet the definition of full employment, and attention is turning to supporting the economy.

Evidence of the pivot has arrived. The Fed now says it expects (and accepts) a slightly higher inflation rate target of 2.6%. It will be reducing its balance sheet by $95 billion a month. The latest dot-plot shows a series of rate cuts – no pause, no increases – over this year and next.

In Canada the CB’s latest summary of deliberations agrees rates will begin to fall this year if projections are met. Our guys are more opaque than the Fed, but the language has changed dramatically over the past few months. “There was some diversity of views among governing council members about when there would likely be enough evidence that these conditions were in place, and how to weight the risks to the outlook.” You will notice that gone is any reference to tighter monetary policy. The only debate is when it will loosen. And that moment is closer.

Meanwhile the Bank of England has paused its rates once again, with the widespread expectation of cuts. In Switzerland this week the CB cut its rate by a quarter point. In America, the GDP is romping ahead more than 3%. Unemployment is once again south of 4%. Corporate earnings are improving. Stock markets are hitting new highs.

The futures market is giving 84% odds of the first rate cut coming in June. Hours before the Fed announcement this week, the chances were 60%. Policymakers are telling us they can live with elevated prices more than they wish to deal with an economic decline – which might force rates lower, faster.

These are facts. Not opinions. No emotion. No revenge.

An aggressive rate-tightening cycle brought a 15-20% housing price correction (except in Calgary of course). Mortgage delinquencies, power-of-sales and distressed, over-leveraged vendors are certainly more in evidence now. Shelter costs – mortgage interest and rent, mostly – have been a huge part of the inflation rates. As the cost of money falls, this will be reduced. The question is whether real estate values will revive as the cost of credit costs flags.

I think we know the answer. Sorry. Hate on.

About the picture: “My wife and I are renters by choice living in Toronto and long time fans of the blog (and you personally),” writes John. “Renting lets us invest in a balanced and diversified portfolio and leaves money for… well, everything that life might throw your way. This is Millie, the loudest purring cat on Earth. If she likes you, you will find her on your lap purring like a little engine. P.S. – Glad to see you moderating the comments section – a lot of bigots seem to be coming out of the wood work lately and I think we need to keep it factual.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.