Green light

Steve Saretsky -

The new Bank of Canada Governor, Tiff Macklem, didn’t mince words in his first speech to the house of commons finance committee, reminding attendees “We’re in a deep hole and its going to be a long way out of this hole.”

Indeed, it’s difficult to find much optimism when it comes to the economic outlook. The Canadian economy was hammered with more bad news as retail sales fell further than expected. Receipts fell 26% in April on a month over month basis, falling significantly further than analysts expectations for a 15% decline. For the first time in 27 years, retail sales fell across every sub-sector.

As the Canadian consumer pulls back, so too has immigration. Once deemed a strong pillar of the economic machine, Canada admitted a mere 4,140 new permanent residents in April. That was down 85% from the same month last year. The number of study visas declined 41% year-over-year, and temporary immigrants collapsed by 80%.

Suffice to say, a whole country has been upended as it hurries to adapt to a new normal. It seems logical to conclude that even with the economy re-opening, many businesses are simply not designed to prosper in a socially distanced society. The threat of a second round of job layoffs is inevitable.

The solution?


Central banks, including the BoC are desperately printing money in a mad dash to keep a failing monetary system on life support.

“For now and for the foreseeable future, we are focused on providing the monetary stimulus and delivering low interest rates to support the recovery. We have no intention of raising interest rates in the current circumstances.” Added Macklem.

It seems the patient is responding. Recent activity points to an increase in sales activity across the Canadian housing landscape where mortgage rates are hitting new lows. National home sales rose 56.9% on a month-over-month basis in May, with many agents reporting a return of intense bidding wars, albeit mostly for single family homes.

Either this is one epic bull trap before a hard fall lower, or Macklem and friends have finally managed to disconnect financial markets from any semblance of fundamentals. With central banks injecting trillions worth of liquidity and foreshadowing a move to implement yield curve control, perhaps frenzied home buyers aren’t as completely irrational as we want to believe.

For those who are unaware, yield curve control involves central banks purchasing bonds to pin yields to a specific target. In other words, central banks will purchase an unlimited number of bonds in order to prevent yields from moving higher. Because, you know, free markets and such.

In an interview with Bloomberg, James Athey, who manages $3.1 billion at Aberdeen Standard Investments in London summed it up appropriately, “It depends on the form and the price but broadly speaking it’s the green light to carry on with the QE trade — buy everything regardless of valuation.”

In other news, The World Health Organization on Sunday reported the largest single-day increase in coronavirus cases by its count, at more than 183,000 new cases in the last 24 hours. The virus isn’t going anywhere, and a vaccine appears nowhere in sight.

Party on.

Three Things I’m Watching:

1. The Bank of Canada continues to purchase a growing pile of Canada Mortgage Bonds.

2. US true money supply is accelerating at a rapid pace.

3. National home sales bounced in May, but remain well below normal levels.

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The Saretsky Report. December 2022