Stability Buffers

Steve Saretsky -

Canadian households are buckling in for what is likely to be a turbulent ride. According to the Canadian Bankers Association, there have now been nearly 500,000 mortgage deferrals completed or in the process of completing since the program was announced two weeks ago. That’s nearly 10% of all mortgages outstanding. That number will surely climb in the weeks ahead, placing further strain on Canadian banks.

OSFI, the banking regulator, is now looking at slashing the stability buffer once again, potentially even removing it to free up liquidity. “We’re monitoring the situation closely and we stand ready to take further steps. For example, on the capital side, we released about half of the stability buffer that we’ve imposed on the major banks, and we’re monitoring that, and we’re prepared to release some or all of what remains, if need be.” noted Jeremy Rudin, the Superintendent of Financial Institutions.

Meanwhile, The Bank of Canada began its first-ever foray into quantitative easing this past week, with the purchase of C$1.0 billion in government bonds. Their balance sheet instantly inflated to new, unprecedented highs and will only balloon further with their pledge to devour $5B of Government bonds each week until a recovery is “well underway.”

Suffice to say a recovery in Canada appears further away than most countries given the enormous build-up in household debt. Empirical evidence has shown recessions tend to be considerably deeper and the recovery much slower when the preceding boom saw a strong expansion of mortgage debt.

As noted in a recent piece from Veritas Investment Research, we can no longer count on the consumer: Household spending accounts for ~68.5% of U.S. GDP and ~63.6% globally based on World Bank data (2019 estimates). The U.S. consumer went from saving less than 4% of disposable income in 2007 to saving 7.5% in 2019. Canada went in the opposite direction. From a high of ~4.6% in 2009, savings rates have averaged ~3.6% over ten years and ended 2019 at 3.0%.

This debt will have to be repaid, and will be done so in a significantly devalued currency. Year to date the loonie has plunged 8% against the US dollar, with top currency forecasters expecting further declines. CIBC, which according to Bloomberg rankings had the most accurate forecast for the Canadian dollar in the first quarter, sees the loonie falling toward a four-year low in the coming months. “When you look at the Canadian dollar right now, it’s primarily a story of oil price pressures. We still don’t know how bad the impact is going to be in the real economy. But it’s going to be very very deep. We’re still very much beholden to political headlines, choppy headlines.”

Three Things I’m Watching:

1. The loonie is poised to slip further, at least according to the top currency forecasters.

2. We have liftoff! The Bank of Canada’s balance sheet has officially launched operation QE.

3.Canadian auto sales plunged 48% year-over-year in March as Coronavirus puts a dent on shopping plans.

PS: I will be hosting a live webinar with debt consultant Scott Terrio. Scott is on the front lines of managing the household debt bubble. We will discuss real life stories, and what he is seeing today as unemployment rises. Register HERE

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The Saretsky Report. December 2022