Tuesday, October 23, 2012

Rate-Hike Redux

Today's Bank of Canada announcement has apparently caught many of the "experts" by surprise. I'm not sure why it's surprising, nothing has changed and therefore nothing has changed. Alongside the Bank of Canada's underwhelming announcement comes a few reports showing the true state of the Canadian economy.

The bank of Canada is having a hard time keeping their story straight. Even though the last few quarters of economic activity have not followed what-so-ever their predictions they still make the claim that it has. It's ridiculous, but alas when you look at world events and the pathetic reality TV of political debates - ridiculous is really just a theme that continues to be played upon.

It gets even more ridiculous however, as the media seizes upon the BoC's increased growth outlook which has been contrary to what major firms are predicting. So what's the reason? Well the BoC explains...
As for hiking slightly this year's growth projection, the bank said that was due to revised methodology recently adopted by Statistics Canada, which bumped up growth in the second quarter one-tenth of a point to 1.9 per cent.
This has been a repeated theme over the last decade in western nations. They revise the methodology then show you fancy charts showing "growth". The gains made by these revisions themselves though continue to dwindle as they divorce further and further from reality. The claim made is that the "utility" remains constant and shouldn't represent quality. Essentially this means that: Should you have to buy dog food because you can't afford steak, you haven't lost anything because you are still getting the same amount of dog food as you used to get of steak. Obviously this example is exaggerated.

Now, as I have been explaining.. Canada has a "housing conundrum" which I don't believe is being portrayed properly or seriously by the media. Canada's problem is not just a simple problem with household debt, or a housing bubble, Canada has a debt feedback loop in which our economic growth is being supplemented by our debt addiction. Since the availability of loans is based on projected future growth we are seriously fooling ourselves into how well we think our economy is doing when in fact all we are doing is borrowing from the future to attempt to keep our heads above water in the present.

When you look at the U.S. prior to 2008, which is where our current household debt levels are comparable too; the U.S. was in the midst of an economic boom (albeit a fake boom propagated itself by cheap money). What's important about this time though is that U.S. GDP was well above the 1-2% level western countries are dealing with now. So why isn't Canada's cheap money policy having the same effect?

Exports remain low

"The bank continues to project that the expansion will be driven mainly by growth in consumption and business investment," but that housing activity will slow and exports are expected to remain below pre-recession levels until the first half of 2014.
So if our exports continue to remain depressed, where is the money coming from for business investment and consumption? You guessed it: debt. So, it is a bit of an oxymoron that the the Bank of Canada is predicting that consumption will resume at current levels and are also calling for an interest-rate hike "sometime in the future". The BoC's interest-rate hike talk is toothless, they know better than anyone that the debt is needed to continue convincing Canada it's not in the same condition as other western nations. This is exactly what the major western consumption based nations were doing prior to 2008, it's why they are having debt issues now. Canada isn't any different from these nations, we're just late to the party.

Quality of life index shows steep drop in recession’s aftermath
Study finds Canadians aren’t feeling economic growth in their daily lives
House prices fall, residents struggle with mortgage rules: study

You know how economists often adjust their data "for inflation"? I propose that a new standard is also required "adjusted for easing". Reports of jobs, economic growth, and the like today are completely meaningless when not presented alongside the deepening debt occurring at the same time (call it the "cost of recovery"). It's no surprise people are not "feeling economic growth", because 1-2% growth in face of the rapid rate in which government and consumer's are getting into debt really points towards negative growth. The investment to get growth is far outweighing the return.

In response to Carney's announcement, the Canadian dollar predictably rose:

Dollar Reaction

Canada’s dollar erased a loss after the decision. The currency was little changed at 99.24 cents per U.S. dollar at 5 p.m. in Toronto after falling as much as 0.5 percent before the announcement. One Canadian dollar buys $1.0077.
This is the real reason the bank can not raise rates, and why it is powerless to prevent a debt collapse within Canada. As before simply talking about a rate-hike results in a stronger dollar and so actually following through with this action would represent a complete decoupling with the U.S. and Canada is not yet positioned for such a move. On top of the feedback GDP/debt loop, we would also see what little exports we have left become unaffordable for the currency war money printing countries almost overnight. The weakened state of these countries has become overly obvious to the point that the slightest hiccup in policy will be bringing down the whole house of cards.

Conclusion

There is no rate-hike in the foreseeable future so long as QE3 reigns and trade remains unstable. Canada requires it's massive consumer debt commitment to fill in the holes left by this drop, but it won't last. If new revenue doesn't come soon the BoC will have no choice but to stand by and watch as our housing bubble finally comes crashing down, rate-hikes or not. You can take that to the bank.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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