Outcomes

When variable-rate mortgages were under 2% and the bank sent you a nice fruit basket, Jake jumped in.

“I started reading your blog too late,” he fesses. “I joined the masses who took a floating rate loan at the bottom and have been paying the price since. Luckily, I am not on fixed payments and I have generally been able to afford life.”

But, alas, that will end. Jake’s fixed-payment mortgage (all the banks, save Scotia, offer them) protected him from a big monthly bump over the past two years, but it also meant an end to debt reduction. All of his payments have not been enough to even cover the interest owning. And he may have to renew at twice the rate.

“I’m generally hearing that in the short term its expected that the FED and BOC will most likely continue to cut the overnight rate but will most likely hit the pause sometime next year (possibly spring?) with a mid to long term projections of a possible increase,” he says (correctly). “I also see the bond market starting to price this in and fixed rates seeing a slight uptick.

“The question: call the “bottom” (or close enough) and lock in now? Take the lower fixed rate and remove the risk knowing that we will likely see that uptick with the long term effects of Trump? Or wait out my term and see what happens/ I feel like I’m answering my own question but as a guy who got burnt the last time around I’d love an expert opinion and I’m sure I’m not the only daily reader who would benefit. Thanks for all you do Garth. I feel significantly more informed since I’ve started reading your blog.”

We touched on Trump and rates a couple of days ago, but it’s worth reviewing current thought and the likely path forward.

The key points: inflation has ticked up again in Canada, from 1.6% to 2%. Our guys were on track for a half-point cut in the bank rate next month. Now that is in doubt, and the odds are for a quarter-point nip.

More salient is Trump. Come January he will be aggressive in his tax-cutting, reg-slashing, migrant-deporting, tariff-imposing and economy-stimulating. We can see that adrenalin and iconoclasm in his cabinet appointments. He ain’t screwing around.

Most analysts figure that will goose the GDP, pour gas on the equity markets and make the Fed turtle. The expectation of three (or more) rate cuts in 2025 is fading fast. Maybe just one more small reduction to come, followed by a pause. And then an increase in order to tame Trump-fuelled inflation.

Meanwhile in Canada, our dollar has been pressured lower as the greenback rises against all currencies. One mandate of the Bank of Canada is stabilize the loonie. More rate cuts would widen the significant gap between American rates and ours, accelerating the dollar’s decline.

Moreover, what if Trump nails Canadian exports with the same tariff he dumps on Mexico or Europe? Economists at Desjardins, BMO, Scotia and RBC warn this could tip us into recession and increase unemployment. (These are all reasons why we’re talking about the Orange Guy ad nauseum lately.) Our CB would not want to go into a slump in mid-2026 or 2027 with rates too low to drop. More reasons to be cautious now, to rethink further reductions.

All of this suggests Jake has it right. The bond market, too. In fact, have you noticed the banks have snuck five-year fixed rates a little higher lately? Before the US election you could score 4.1% easily. Now it’s bumped to four and a half.

Could we travel back to the 5-6% range by the time Jake’s five-year VRM hits the end of its term (in 2026)?

You bet. A bank prediction for Canadian rates almost 2% higher than now if Trump does what he said he would do (and he probably will) still stands.

Of course, anything can happen. An international trade war could bring a global recession, widespread job stress and plunging rates as CBs scramble as they did during Covid. That would be on Trump. Or an on-fire US economy could send the American dollar surging much higher, sucking in capital from around the planet as rates there plumped, crashing the loonie and forcing the CB to increase substantially. Or the US could withdraw support for Ukraine, weaken NATO, allow Putin to keep conquered territory, then face the consequences when an alliance member is invaded. Or he could decide to be a normal, presidential, responsible leader and embrace America’s economic, military and political leadership of the free world – losing his extreme MAGA base.

What do you think?

Jake and I are one. Lock ‘er up.

About the picture: “Thanks for answering my recent question about realizing gains,” writes Brian. “I shared it with my fellow investing minions. I feel I owe you a dog photo. Our dog died a few years ago so we live vicariously through the pups around us. Like Daisy, our next door neighbour barker. She’s only a few months old, a bundle of energy, and grows as fast as the weeds on my side of the fence. Her owner is okay with me sending you this, but Daisy insists if you start to charge for your excellent advice she wants a cut.”

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

Source: https://www.greaterfool.ca/2024/11/22/outcomes/