It’s no bluff

Is it time to rethink interest rates? Looks like it. The party may be ending sooner than the masses expect.

Again, a lot of this has to do with the Orange Guy.

First, he is Mr. Inflation. You cannot slash corporate taxes to 15%, eliminate taxes on tips, old age payments plus overtime and impose global tariffs which are paid by importers and passed on to consumers, without hiking prices. Impossible. The stimulus that tax breaks alone give the American economy will be enough to stop the Fed in its tracks.

But wait. Already happening.

The US central bank boss is seriously reconsidering more rate chops in 2025 and, as we previously reported, analysts here are busy scaling back their projections. If the Fed goes on hold, you can assume our guys will, too. Meanwhile the US budget deficit just hit $2.02 trillion – a record – so you can see how much money is flying around, unanchored to economic activity.

No surprise then that bond yields have been rising. Here, too. The benchmark Canadian 5-year has added a third of a point since the week before the American election. Mr. Market sees what’s coming, and investors have been positioning themselves for a rekindling of the CPI and higher rates.

Yes, and then there’s the dollar.

Ours is not going down. The American one is going up. It has nothing to do with Trudeau or the hapless Libs, but everything to do with Trump – whose recent cabinet appointments prove his bombastic, fantastic campaign rhetoric was not BS. It was an agenda.

Yikes.

So the stock market may have given up some pf its orgiastic Trump enthusiasm last week, but the greenback kept surging. The reasons: the Fed will probably stop or slow its rate-cutting; Trump is really, really, really going to start a global trade war and drive US prices higher; and his America-first agenda will cause big woes for smaller countries (like ours) with substantial US$-denominated debt, while helping an inflow of capital to Trumpslavania.

So the loonie has been sideswiped, losing 2% in a week, and drifting down to 71 cents US.

What will our central bank do? Continue to let the dollar erode, driving up import prices and adding to inflation – which has just been wrestled into the dirt? Or will Tiff fulfill his mandate and try to stabilize the loonie through purchases, bombast and a hold on interest rates?

So much we don’t know. But recall the prediction made by Scotiabank some months ago that a Trump win (with tariffs) would end up adding to our inflation and raising the Bank of Canada rate by 1.9%. Now we know Trump controls all levers of US policy (the presidency, the House, the Senate and the Supremes). We know he’s unhinged enough to put people like Matt Gaetz and RFK Junior into his cabinet. We know mass deportations are being planned. We know two unelected billionaires will be tasked with ‘government efficiency’ when both stand to personally benefit from deregulation. So, we know there is volatility, unpredictability and chaos ahead. Just as many of his followers wanted.

Of course, this is not what Canada wants. It’s not what young people trying to buy a home want. It’s not what your portfolio wants. Or your retirement. Or the globe.

But it’s here. Take cover.

About the picture: “Here is a picture of George in his favourite spot on the patio,” writes John. “It has to be summer and in full sun for him to enjoy it and when he does it is hard to get him to come in. Any chance of rain, snow or excessive breeze will have him begging to come inside. Daily dogblog reader, thanks so much for the insight.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/11/17/its-no-bluff/