The Bank of Canada has cut its overnight rate for the second time in the last six months – to 0.5% – and the Canadian dollar has reacted as expected, [indeed, as intended,] putting the Canadian dollar at a six-year low in terms of dollars (-10.2%) and pound sterling (-10.4%). So why the rate cuts and competitive devaluation?
Why the rate cuts and competitive devaluation? Well, instead of global growth resuming and the status quo being pierced back together again as hoped for, Canada is experiencing:
- a technical recession with two consecutive quarters of negative growth,
- crashing commodity prices [see HERE],
- an iffy recovery for the United States,
- an eurozone held together by a thread
- and every other country either:
- creating money out of thin air,
- cutting rates,
- using monetary stimulus,
- or borrowing extra debt, it makes it extremely difficult to go against the grain.
Against that backdrop, there’s only one thing to do: cut rates again!
Despite the Canadian economy treading water as of late [see HERE], there are two concerning metrics (vulnerabilities) that have been peaking:
and, Stephen Poloz, the Governor of the Bank of Canada, acknowledges that the rate cut could exacerbate these vulnerabilities.
Global monetary policy these days is a fast moving stream. It’s far easier to paddle along with the current and simply hope that there are no waterfalls or sharp rocks further down the way so paddle away, Mr. Poloz and let’s hope there’s no rocky spots downstream that could capsize the boat.
Related Articles from the munKNEE Vault:
June 29, 2015
Chilling references to a potential (likely) financial crisis in Canada keep cropping up in official statistical data releases. First it was concerns about the housing bubble there and the high level of personal debt to income, now it’s about how hard manufacturing is getting hit there in spite of the loonie (Canadian dollar) dropping 17% against the US dollar in the past 15 months. It really begs the question “Oh Canada, Are You Prepared For What’s Coming?”
Canadians are using their appreciating homes as ATMs (as Americans did in the early 2000′s before their housing crash) and the funds being borrowed are not just for home improvements, but in many cases to fund living and lifestyle expenses.
The Canadian housing bubble will never blow up. There’s simply too much “plankton” in the water. It keeps the “food chain” healthy and offers ample nourishment for the “big wales and sharks” and shorting the Canadian housing bubble is useless. Here’s why.
With interest rates being pushed lower year after year, interest expense as a % of disposable income has been declining in Canada and, for the moment, these low interest rates keep the whole thing glued together but, were interest rates to ever rise, Canada’s economy would blow up. Here’s why.
The real estate sector in Canada is in a bubble that could burst at any time according to the IMF, Deutsch Bank, the Bank of Canada and The Economist.
Canada’s housing bubble has been a sight to behold. Home prices only dipped 8% when the US housing market crashed. Then it re-soared. Now, across the country, home prices are 26% higher than they were at the already crazy peak in 2008. In Toronto, they’re 42% higher! There is a major drawback Canada’s housing bubble beyond the fact that it will eventually crash with terrible consequences.
The Canadian housing market is deep into bubble territory. We all know that bubbles can go on for longer than most people think but with the crash in oil prices and people fully believing their own hype, the market is set up for a big fall from grace. Canadian households are deep into debt and make American households look like penny pinchers. Here are five charts showing that the implosion in Canada’s housing market is inevitable.
If oil prices remain anywhere near the current levels for a prolonged period – something the Saudis are aiming for – Canada’s economy is in serious trouble. Here’s why.
Over the last 14 years, house prices in Canada have increased by 150%, twice as fast as in the U.S…[and] far outpacing household incomes. Any increase in interest rates would prick the bubble, and its implosion would trigger all sorts of mayhem to the point that the Canadian government has expressed concerned that such an event would be a significant risk to the “stability of the financial system”.
In May, prices in Toronto rose another 5% from a year ago. For all types of homes, prices are now 42% higher than at the crazy peak of the prior bubble and, based on data from Canada Mortgage and Housing Corp., the number of completed but unsold condos in Toronto spiked in May to 2,837, an all-time record high. The magnitude of this spike far exceeds the monthly ups and downs in recent years, and exceeds even those dizzying spikes in the late 1980s and early 1990s when the Toronto condo market went completely haywire. Now all we need for this condo market to remain “well-behaved,” despite soaring starts and unsold inventories, is for a lot of buyers with a lot of money to emerge very quickly from China or wherever and “absorb” these units and all the units still coming on the market. Or else, this is going to turn into one epic condo glut.