As expected, the Bank of Canada Cuts by 50 BPS today. What does this mean for borrowers?
Well that depends. Commercial Bank prime lending rates should follow suit so rates variable rate mortgages, HELOCs and Line of Credits will be cheaper.
Any short term interest that you’re earning on investments in things like money market funds, GICs and savings accounts will drop a bit.
For spenders falling interest rates are a godsend, but for savers it makes life more difficult.
Central banks around the world are in a rate cutting cycle and the US Fed is at the center of the action. They recently cut by 50BPS in September. Since that cut, bond yields have risen on the long end of the curve.
This increases the likelihood of a sovereign debt crisis. The fact that this phenomenon is happening in the US, Canada and other countries, we are looking at a global sovereign debt crisis.
Many high profile investors like Stanley Druckenmiller and more recently Paul Tudor Jones have come out and said that bonds are toxic and investors should stay away.
Here in Canada too, bond yields are creeping up as seen in the chart below.
The big worry is that central banks are cutting interest rates while government spending is out of control with no end in sight. This is a recipe for inflation which is why Gold and now Silver are ripping higher.
Since 2020 I’ve been concerned about growing debt levels here in Canada and around the world and how this will impact my investments.
There are basically 2 roads for Governments to take: 1. cut spending and pay down debt which would be deflationary since government spending is a growing percentage of GDP.
Or 2. Hold rates down and let inflation run hot to make debt more affordable to carry.
The way things look today is that they opted for option #2. Bond yields are rising which means sooner or later Central Banks will have to restart QE programs (likely in response to stocks, bonds and real estate crashing). We’re not there yet, but it seems to be going in that direction. The big fear is that if and when that happens get ready for massive inflation.
When that happens, things that everybody owns (general equities, bonds, cash, real estate) will go down big time and things that nobody owns (Gold, commodities) will massively outperform.
Since Canada is a big producer of real things like oil and natural gas, timber, agricultural products, and minerals, we should do alright in that highly inflationary environment. If our government starts to pursue policies that are friendly toward those sectors instead of pumping housing.
So while I think Canada is a mess and will likely get worse, in the long run we should do just fine depending on whatever placeholders we elect.
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