Are we smarter than the Bank of Canada?
And by "we," we don't mean "Nick and me."
We mean the collective "we".
The group of real estate investors who are actively watching the economy.
Did any of us really believe that Canada was going to raise interest rates in 2015 like we were being told?
We were told that rates would rise soon. And we were told this repeatedly just a few months ago.
And we were told the exact same thing in 2010.
And in 2011.
And in 2012.
We've written about "low rates forever" on this blog before, multiple times... Here's just one of the posts back in 2012, click here for it.
It's really not that hard to out-think the Bank of Canada's interest rate moves.
I mean, people make it sound complicated, but it isn't.
We're actually surprised at how easy it is to out think them.
Here's one of the reasons we know interest rates aren't going anywhere quickly, check out this chart from PeakProsperity.com:
That's the growth of credit since 1952.
Check out what happened in 2008-2009 ... that little blip caused some major financial problems, didn't it?
Now, look at the rate of growth after that blip.
Doesn't look as smooth and steady, does it?
The economy needs credit growth to continue growing and expanding.
If we don't get it then there are problems.
The main problem is servicing the growing global debt.
If the economy doesn't produce enough income to service its debt we got problems.
One of the ways to check income for individuals and for the government is to analyze its growth rates.
When incomes are increasing it's a sign the economy is humming away and growing and they are taxed so growing incomes means a growth in government revenues too.
Check out income growth in the U.S. since 2008...
That's after trillions of dollars in "QE" have been fired into the economy.
And consider this:
U.S. debt has grown 64% since 2009. Click right here to see the latest data.
Here's how many people in the U.S. are working...
That's the lowest rate since the late 1970's.
Not fun and not funny ... is it?
So if we can look up this data and feel pretty comfortable that rates are not going to rise in any real way soon why can't the Bank of Canada?
The U.S. buys 75% of our exports so they're kinda important to us.
Can we look at U.S. data to predict what we'll do in Canada around interest rates?
We think so, yes.
So if it's so obvious that the data isn't screaming that things are growing we have a question...
Internally does the Bank of Canada know they're not going to increase rates but don't want to admit it?
Wouldn't that be cool to know?
If anyone can get us some face time with Canada's Bank of Canada Governor please set it up ... we'll pay for the opportunity to chat (we'll ask that any payment go towards Canada's debt ... LOL!).
And consider this, there is a precedent for long stretches of low rates, just look at the beginning of this chart:
A couple of quick and important points:
1. We are not economists and don't pretend to be. But predicting interest rate moves in Canada is a lot about watching what the U.S. does. Keeping an eye on the data above can give us some great clues. And then mix in some Canadian data like "oil prices" and you can get a pretty good idea of what the Bank of Canada will do. Are we simplifying things? Yes. Has it worked pretty well? Yes.
2. Rates may go up soon, maybe even this year. What we're talking about when we talk about rates increasing is a large 2-3 or even 4% move in a short time frame. A quarter point or even half-point move isn't what we are considering a real big move in rates. At this point moves of those sizes are almost symbolic moves for headlines.
3. What are we missing? If there's a huge loss in confidence in the financial system then rates can spike up quickly, overnight even. We have to admit this and always be watching for it.
As real estate investors, Nick and myself feel like we're always walking around a little paranoid.
Feeling like we know what's going on but there's always a little uneasy feeling that anything can happen at any time.
Just yesterday we recommended that it's not a bad idea to lock in your interest rates on rental properties for as long as you can.
Fixed rates are low right now and if it will help you sleep at night lock them in ... for five years, for ten years even!
We still heavily use variable rates but as we mentioned we're constantly watching and ready to lock them in at a moments notice - knowing that when we do we may have missed the time to get the lowest fixed rates possible.
If you're interested in growing and protecting your portfolio it's in your best interest to begin studying this stuff.
Don't take our word on interest rates.
We're just two Mississauga boys who are trying to figure things out.
Be your own expert in this.
It'll give you confidence and the know how you need to create cash flow and wealth for you and your family.
Until next time ... Your Life! Your Terms!!
I greatly value your input and enjoy the Economic articles and forums you guys have shared. I'm a little confused by today's article on Predicting Interest Rates. On one hand it's shifting towards that it's not going to happen any time soon. And on the other is seems like you are suggesting that it is and substantially and advised readers to Lock In to fixed rates for as long as you can? I believe the economy ebbs and flows in cycles and it looks like by 2020 the spike in Rates may occur again not helping that the Baby Boomers are not spending any more and the economy has continued to spiral since the last 2008 Financial Crash. My mortgage is up for renewal in June and I was convinced I was going to go Variable and possibly turn my rental into a Variable as it's at 3.49% right now. But now I'm second guessing. As I thought increases would be slow and gradual. Newspaper articles are contradictory! Could you please clarify your position on this --- all being I know no one has a crystal ball. Thank you
Thanks for the comment. This is obviously a massive topic but let's see if we can sum it up.
Here's our thoughts:
The current structure of central bank banking has no options other than to keep rates low in order to attempt to spur some economic growth.
So because of that we believe rates will be low for a long time to come.
However, the risk to this thinking is that if there is a general loss in confidence by the markets in the the capabilities of the central banks then there may be this eureka moment where everyone goes running for the door and rates jump rather quickly.
So we're expecting them to stay low and expect all the powers of the central banks to make that so. However, we're perpetually scared that they could jump.
It's strange we know. We're betting on low rates for as long as the central banks can control the system. But if the system breaks watch out.
Not sure if this is helping at all. Bottom line is we like variable rates but these feel like very uncertain times to us so if you're at all nervous the spread between variable and fixed is so small right now we'd say just go for the fixed and sleep at night!
Hope this helps more than confuses!
Well written and informative as always. I could not agree with you more. I often have this same discussion with friends and clients. I am going to forward your article to a few of them, as it gives them a great 'Third Party" perspective from a knowledgable source, such as yourself. All the best friend. I will talk to you soon. -Neil
It's low. It might stay low. But it might also go up. We can't be sure. If something unpredictable happens it might change.
Thanks for that Neil!
As hilarious as that sounds, yes, that sums it up!
As long as there low real inflation and low real income growth then they stay low unless the Fed loses control to the markets.
Given the uncertainty of the times maybe not a bad idea to lock some of them in and ride the variable train on the others!
I'm going to call a .25 additional drop in March of which the banks will once again only pass on a portion to customers. Oil isn't rebounding fast enough and I don't see the world supply dropping anytime soon. The Canadian dollar is causing gut wrenching issues for guys like me who are importers but it's making our exports overall cheaper which is not yet enough to cover the losses in oil and needs further "encouragement" if the government wants to push in this direction, which I think they do. Lastly, I think the banks got away with a partial cut last time and they'll do it again if rates do go down in March to protect their margins on mortgages. More strategically this way they won't have to move up again so much that the variable customers notice when rates do eventually go up.