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0 Comments A Nice Stocking Stuffer – A Rate Hike

Article written by Boris Bozic on the 14 Dec 2015 in Current Events,Economy,Interest Rates,US Politics

It looks like our neighbours south of the border will get something “special” this holiday season; like an interest rate hike. After almost nine years the U.S Federal Reserve rate is about to be increased.  Chairwoman, Janet Yellen, has been itching to raise rates for a while now, and the latest economic data from the U.S. gives her an opportunity scratch that itch. A rate hike is a signal to Americans, and the global economy, that worst is behind them, and the need for government to stimulate the economy is in the rear view mirror.

Or is it? The U.S. November job report indicated that over 200k jobs were added to the work force, their dollar is soaring, the unemployment rate has been cut almost in half to where it stood in 2008, so what’s not to be giddy about? Well, there is data to support that consumer spending, housing starts, and job creation have flattened. So the question is what happens if their economy has flattened, while at the same time the overnight lending rate is going up? Some pundits are actually suggesting that raising the rates now gives the Fed some wiggle room if they have to lower rate, yet again, to stimulate the economy. It’s not as if this hasn’t happened before.  Like back in 1930′s, a rate hike, followed by a quick rate drop, all the while knee deep in the Great Depression. Yeah – that little historical nuisance.

So what does the Fed’s move to increase rates mean for us here in Canada? For the time being, not much. We normally walk in lockstep with the U.S. Fed, but we’re about to decouple from that standard practice, and continue on the path we are on today. The reality is that our economy is still too fragile to mimic the Fed’s move. The oil sector in this country has been hammered, and the fallout has been far reaching. Some are suggesting that oil could hit a low of $20 USD a barrel by March. The natural instinct is to scuff at such a suggestion, in the same fashion it was to scuff at the suggestion that oil would be $40 USD, when it was selling for well over $100 USD, a few short years ago. Today, the price of oil is $37 USD. The many variables which impact mortgage rates, cost of funds etc., means we might see an uptick in mortgage rates, but it’s still cheap money, and that cheap money will be available for the foreseeable future.  As we all know that poses a whole other set of challenges, like tightening mortgage rules to curtail borrowing. There’s always a yang to the ying.

For the time being Americans get to say that the worst is behind them, and that they are healed and can move on. They can put the ravages of the sub-prime mortgage crisis, and the near collapse of the global economy, caused by them, in the rear view mirror. For the rest of the world? More time and recovery will be needed before a deep breath can be taken.

I find it somewhat ironic that in the same month that the U.S. Fed will raise the overnight lending rate, a movie is being released about the sub-prime mortgage crisis. The movie The Big Short hits theatres today. The movie is based on a book, The Big Short, which hit the shelves back in 2011. The movie’s cast is rather impressive: Christian Bale, Ryan Gosling, Brad Pitt, Steve Carrel, and Marisa Tomei. The movie is based on a true story of a small hedge fund, which tried to warn everyone that the sub-prime mortgage market was nothing more than a glorified ponzi scheme. When no one would listen to them they said fine, we’ll bet on the market collapsing, and on the institutions who bought the paper. And the rest, as they say, is history. Unless, of course, you live anywhere but America, and are still waiting for your economy to completely heal.  For an industry that isn’t very “sexy”, I bet it makes for a good movie.

Until next time,

Cheers.

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