I have been spending quite a bit of time focused on near-term economic issues recently as we try to get some understanding of how financial markets will react to what is turning out to be a sort of global "economic crossroads".
At the moment, it is focused on US monetary policy vs. that of the rest of the developed and emerging economies around the world.
It will be consequential because there are lots of long-term implications that can and may result.
If the US Federal Reserve starts to raise interest rates, the repercussions will be felt on a global scale.
Canadian household debt is not immune and Canadian household debt is at record levels. For some reason (perhaps low interest rates for the last 7 years), Canadians have developed a sense of complacency that has them borrowing well beyond their income levels (1.65 times).
A true lack of financial literacy has come to the fore and the worst of behavioural errors in financial judgement is pending:
Asset prices do not go from the lower left (on a chart) to the upper right (as we always hope that they will go) without a correction.
Assets that pay you to own them (provide income): stocks, bonds and rental property are assets that you can stay with over longer cyclical ups and downs (as long as they are not over-encumbered by borrowing to own them).
Assets that don't pay you to own them: principle residence, vacation property and cars (which in fact have significant costs to ownership) and gold or other commodities, art and jewelery will be more vulnerable.
If asset prices fall, the costs to "carry" these assets does not, including the cost of the debt (mortgage payments). If asset prices fall and at the same time interest rates rise, many will find themselves seriously underwater (as the costs will out-pace their income, if they can remain employed) and this will begin a "snowball" effect unprecedented in this country (think US housing crisis 2008).
It is not yet clear if the Trudeau government has weighed the possibility of this happening and built it in to their planning, however it is clearly becoming the "elephant in the room".
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist