Extremes

Kevin is 58, lean and fit, experienced and sharp. “Top of my game,” he says. So it’s hard to be punted, especially as v-p of a health care company. That was two weeks ago, and he still puts a suit on and heads out the door each morning. I doubt he’s told Wendy yet.

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Don’t know about you, but in my circle the number of people being kicked to the curb is little short of remarkable. Especially four years into a recovery.

On Thursday Alison Redford did something she’d never imagined when vaulting to premier of Alberta. Her budget has a $2 billion hole, cuts government spending, tosses election promises overboard and ushers in times of austerity. Resource revenues have plunged 47%. “It’s going to be painful for a lot of folks,” the finance minister said, swiftly.

Days ago in Ottawa F summoned the reporters to talk about the latest stats on the economy. “I will have to account for this in our budget projections,” he said, “and the revenue projections.” That means you can kiss off any hope of a balanced budget in the next few years. More red ink instead, and job cuts in the NCC.

Just what you’d expect with the economy softening faster than Rob Ford’s tummy. The latest GDP numbers suck. The economy is growing at a Lilliputian 0.6% and in December actually shrunk. Compared to the good old days in 2011, when growth was four times higher, it’s little wonder the dollar has careened lower and the Toronto stock market is a serious laggard. As I mentioned some days ago, inflation at half a per cent is not even in the Bank of Canada’s comfort zone of 1% to 3%, which makes some people (like me) worry about deflation.

Speaking of the central bank, let’s talk interest rates for a moment. For the past 30 months the bank has sweated about horny house buyers, bloated lines of credit and bankers who never say no. Household debt soared to record levels, gassed by massive mortgages as home ownership climbed to an unprecedented 70%. The soon-to-be-departed Mark Carney warned repeatedly that rates might have to rise to squish the problem. But, instead, he let the elfin deity do it for him.

F’s killing of 30-year mortgages had the effect of raising rates by almost 1%. That was enough, and things sure have changed as a result. Borrowing levels have stabilized (but debt keeps rising), the currency has stumbled, growth has vanished and chatter of higher rates is gone. Oh yeah, and Kevin lost his job.

Said the central bank this week: “With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time.” Translation: interest rates are staying where they are because the current situation is freaking us out a little.

In practical terms, what this pathetic blog bleats about day after debilitating day is part of a much larger story. Sure, house sales crumbed last month by 29% in Vancouver, 15% in Toronto and 18% in Saskatoon, and prices are starting to follow. But add to this struggling retail sales, a miserable Christmas and big layoffs at stalwarts like Best Buy and Sears Canada, and the story deepens, especially with our aging and unprepared population.

Sustained low interest rates will keep millions of indebted people from blowing up, but they’re hardly good news. Mortgages at 2.99% will not rekindle flagging condo sales or rescue Victoria. After four years of cheapo money, it’s old. Another year or more of emergency rates simple means we still have one, as the economy loses its grip on growth and slides towards contraction.

This is why residential real estate is cooked.

But there’s more. If the economy’s anorexic, why are corporate profits obese? How can the stock market keep rising (at least the ones in the US and elsewhere) when the middle class is sucking air?

Simple. We’re moving more to the extremes. Big companies who got lean and efficient after the GFC face zero pressure for higher wages and salaries, since everyone’s just happy to have a job. Plus they, like you, can borrow money at dirt cheap rates, then write off the interest. More falls to the bottom line, keeping profitability robust even in questionable times.

Investors have reaped, while savers are raped. People with money to invest (the 1%) have had double-digit growth in the past year and close to that, on average, for the past three. Folks with money to buy stocks, ETFs, preferreds, REITs and other securities have enjoyed tax-advantaged returns while those stuck in the orange guy’s shorts collect dust for interest, then see it taxed away.

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Anyone who listened to me years ago preaching about balance, diversity and liquidity knew enough to bail out of houses at their peak, trash debt while rates were in the ditch, and get ready. The US has turned into the phoenix I predicted, financial assets have trumped real ones and every crisis the doomers have gushed about on this blog since 2009 has proven illusory.

So, yeah, the economy blows. Rates will stay low. Houses will fall. Jobs will go. Kevin’ll stay unemployed.

But who said anything’s fair?