I don’t know why I found this chart surprising: maybe it’s because as a good Canadian kid, I look at America as filled with a bunch of gambling aggressive cowboys, vs. our more reserved nature (apologies to our American friends!) And perhaps part of it is recalling the severe real-estate crash in the US as a result of the so-called “sub-prime” crash in the US housing market in 2008, where in the simplest terms many people had taken on housing loans they couldn’t afford.

 

Housing leverage is still low in the US, but rising, while it’s currently at a near-record-high in Canada :

 

 

This is important to understand in the context of this market. The Bank of Canada this week lifted the official rate by 50 bps. (In the U.S., it’s widely expected they will increase rates by another 75 basis points next month). Inflation in Canada has declined, from over 8% to 6.9%, and this trend is so important on so many levels. One of the key measures of the Canadian dollar vs the US dollar is this bank rate. If the U.S. continues with more 75 bps hikes, while in Canada we move slower, it’s likely this will make the US dollar even stronger in the short to midterm.

 

Going back to the graph above, given the relative elevated debt levels of Canadians vs U.S.: rate increases in Canada have a more negative impact in Canada than the U.S. A reasonable outcome is likely less increases in Canada, and more in the U.S: all with the aim to reduce inflation, without harming the economy too much.

 

Maybe a dry topic, but all of this, if there is one takeaway, is that higher rates are likely to persist, and this has created investing opportunities in fixed income that haven’t been available for many years. I hope to firm up a date for the end of November, or early December where I will have 3 actionable ideas for areas to explore investing in this context.

 

Trick or Treat this weekend. Let’s be honest, having children dress up in costumes and go door-to-door like little beggars demanding treats is kind of weird. You can blame my ancestors from Scotland and Ireland, who had this legend about a Stingy Jack that invited the devil to have a drink with him, then tricked him, but the Devil got his revenge, and Jack had to roam around in a carved-out turnip and burn coal in the dark. It’s a sordid tale, but the tradition traveled to North America with those immigrants, and as pumpkins were in abundance, that’s why we have them. Anyway, I’m sure that many will over-indulge in treats that my kids bring back (or from a stash that I have hidden!)