Bank of Canada Pure Panic: How Long Can Rates Rise?

Message from Tom & Nick

We made it.

Our family, along with our father and brother-in-law, joined Nick’s family on the Adriatic this week.

That’s me after our first amazing patio dinner…fresh fish, prosciutto, local wines, amazing desserts, and espressos.

I’m typing this out first thing Thursday morning, from our balcony, staring over the sea at the island of Brač.

Later this week, we’ll take a boat over to visit some of our favorite island beaches and restaurants.

And next week there are some long-time Rock Star Inner Circle members joining us for a multi-day, island-hopping, boat trip.

It’s magical out here.

Getting away from home, in a different time zone, somehow clears the mind. We get a better perspective on life, business, and real estate over here.

And right now, with the Bank of Canada in a full panic over inflation, perspective helps.

Here’s how we see the almost unbelievable 1% rate hike yesterday.

1. The Bank of Canada is in full panic. They created this problem by the way, so it’s their issue to solve.

But the panic comes from this…

There is nothing backing our dollars. Zero, nada, zilch.

Our money, globally, is just a confidence game. If you and I don’t believe dollars will keep their value then we trade our dollars for “real things” faster and faster.

The problem with this of course is you can’t print real things out of thin air.

And with more dollars chasing the same amount of things, prices go up.

As Jeff Booth likes to say, when money is abundant, goods are scarce.

Because the Bank of Canada’s surveys are showing Canadians are expecting inflation to be higher for longer…they had to come out swinging this week and try to kill that with a big, juicy, rate hike.

Time will tell if they have done that.

2. Here’s the problem…

Global debt is at astronomical levels.


We are almost at a 4:1 ratio of Global Debt to GDP.

And you may rightfully say, “Well, who cares…not my problem.”

But the consequences of debt with higher rates affect us all.

Here’s how…

When rates rise it sucks money out of the economy.

People, businesses, and government use their liquid cash to make higher interest payments instead of growing the economy.

It’s like these higher rates are vacuuming up all the liquidity in Canada and in the rest of the world.

With that ratio of 4:1…

Every 3% increase in interest rates on the debt (the 4 in the equation) requires a 12% inflation rate in GDP (the 1 in the equation) for the GDP just to keep pace with the debt growth.

To repeat, every 3% rate increase requires 12% inflation.

If you don’t get that level of inflation you literally have no dollars circulating to make the higher debt payments.

And how do you solve that? You print even more dollars! And the debt spiral takes off, destroying everything in its path.

So the central banks are playing a very dangerous game right here, right now.

They are trying to raise rates, and bring inflation down, without killing inflation outright because they actually REQUIRE inflation for the economy to survive.

They are trying to suck dollars out of the system but “not too much”.

It’s like walking an economic tight rope.

Fun, right?

Raise too much and you cause a debt spiral.

Raise too little and inflation destroys the value of the dollar.

Good luck, amigos.

Wouldn’t want your job right now.

But they caused this problem by keeping rates too low for too long after 2007-2008 crisis and it has left them painted into a corner.

What’s our best guess on where this goes?

Soon enough we start hearing comments like “Well, we’ll change our approach as soon as the data changes.”

Said differently, “We’ll drop rates or inject new cash into the system if needed and we’re praying the inflation rate changes quickly before we have to do that.”

The next 2-3 months of inflation data is going to be SUPER insightful.

3. So why are things like real estate, equities, and Bitcoin taking a price hit right now?

Remember, this is a liquidity crisis.

Any liquid cash is getting sucked out of the system. And if some people/businesses/governments don’t have liquid cash to make payments they sell assets.


There’s very little new liquid cash available because it’s harder to qualify so hard assets, like real estate, cool off.

But, in our opinion, it’s a very temporary thing.

In the GTA and Golden Horseshoe, we have a structural housing shortage and it’s forecasted to get worse (see previous week’s emails for data).

So the supply/demand fundamentals for real estate remain strong.

And with that 4:1 ratio mentioned above, we know new cash, new liquidity, must enter the system or it collapses under its own debt weight.

So, the opportunity for us is this…

If you see good assets like income properties, Bitcoin, even stocks of solid companies that you love, you may be getting them “on sale” right now.

With real estate it's important to never over-leverage, never go deeply negative on your monthly carrying costs.

Real estate is a game of survival. You make money by not timing the market, but by “time in” the market.

If inflation rips on then we believe you want to own hard assets.

If the Bank of Canada causes a recession and needs to lower rates and inject new liquid cash into the economy…you want to own hard assets.

This is just our 2 cents, of course.

Both scenarios are devaluing the dollar and increasing the dollar value of assets.

And we may be in a short era of tightening now, but money must become abundant again. It’s just math as @FossGregFoss likes to say.

Remember, when money is abundant, goods are scarce.

Good luck out there!

Play nice, play safe, keep liquid, and have fun!

This week we have a clip from a Live Broadcast we did with Rock Star Members a while back. It's linked below for you.

And we have a brand new podcast with Ruben Furtado discussing what he’s seeing in the high-end, luxury real estate market.

Next week at this time we’ll be on a boat somewhere…so you may or may not hear from us, stay tuned!

Tom & Nick

Related Articles

crossmenu linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram