On June 15, the day the Federal Reserve raised interest rates by 0.75%, I was attending a national meeting in Quebec City. Some people in the circle of friends said it was expected, which surprised me. An increase of 0.5% was expected, but an increase of 0.75% was unexpected. The Federal Reserve has always believed that the CPI in May will peak, and the industry also believes that it will stop raising interest rates in September. However, it was discovered after the inflation data was released on June 10 that inflation had not peaked. The U.S. stock market fell sharply on the 13th and 14th, indicating that the market still believed that this round of interest rate hikes would be 0.5% before June 10th. It was only on the weekend of the 11th and 12th that the market felt that the Fed might raise interest rates by 0.75%, so Black Monday appeared on the 13th. The 0.75% interest rate hike was not planned or expected. Even the chairman of the Federal Reserve did not expect it. I don’t know how people in the circle of friends expected it. The 0.75% interest rate hike is a result of the Fed Chairman's frequent harsh words, which has brought the atmosphere to this point. It is a necessary increase, not something that has been thought out. Therefore, I believe that the black swan of interest rate hikes may fly out at any time, and forecasting a week in advance is useless. How much to increase depends on the atmosphere.
There is a 90% chance that Canada will raise interest rates by 0.75% on July 13, also because of the atmosphere. I am writing this memo in a hurry to remind everyone of some necessary things:
The first item is that the current Canadian mortgage stress test interest rate is still 5.25%, but this lowest stress test interest rate will be ineffective on July 14. Of course, it is also possible that OSFI announces an increase in the stress test interest rate before July 14. In short, After July 14, everyone’s borrowing ability will be reduced. Friends who plan to buy a house need to make an offer as soon as possible. Pre-approval is useless. Friends who plan to apply for additional mortgage or refinance must prepare and submit the documents before July 8th. The bank needs to organize the documents on the 11th and 12th, and must submit the application on the 13th. By July 14th, the borrowing capacity will decrease. After the central bank raised interest rates on June 1, borrowers have almost only one option, that is, floating interest rates. Because with any fixed interest rate in any contract period, the stress test interest rate exceeds 5.25%. Only the actual interest rate of floating interest rates is lower than 3.25%. After adding 2%, it is not higher than 5.25%. After the interest rate increase on July 13, the stress test interest rate for all loan applications will be higher than 5.9%, and the current lowest stress test interest rate of 5.25% will become permanent.
The second item, We need to be prepared for inflation in the long term, and purchase properties that can be remortgaged as early as possible.Both the United States and Canada have entered a vicious cycle of rising wages and prices. The supply-side pressure on human resources is very high, especially during the period of rebuilding the supply chain. The increase in both rent and owner-occupied loan interest payments in 2022 will push the CPI to continue to rise. Low rents and low interest payments during the epidemic were once decelerators of CPI and have now become accelerators. At present, what we are facing together is not the issue of interest rate hikes, but the issue of inflation. If inflation has not yet peaked, interest rate increases must continue. I personally believe that this round of inflation can take as short as 2 years or as long as 10 years. If the interest rate is not higher than the inflation rate, it will be difficult for inflation to come down quickly. When Paul Volcker raised interest rates in the 1970s, he raised interest rates above the inflation rate to suppress inflation. In April this year, Canada's CPI was 6.8%, and Canada's inflation rate in May is expected to be 7.3%. Today, if the interest rate is raised above 8%, it would be disastrous. Therefore, it is difficult to suppress inflation by raising interest rates blindly. On the contrary, it may cause a cliff-like hard landing instead of a soft landing. Therefore, I believe that interest rate increases will be intermittent, and inflation will be difficult to suppress in the short term. People are still celebrating getting out of the epidemic, and many families have vacation and travel plans. The rebound in consumption this summer will be inertial and unstoppable. I think it's better to be pessimistic about the future and optimistic about the present. If you are a family with wealth hidden in real estate, you need to use the cash in the real estate to prepare for a rainy day.
The third item is that the overall situation of the international political and economic landscape has been determined. We need to pay more attention to our own financial situation, mind less other things, and focus on the financial security of our families. Japan still adheres to quantitative easing, and its exchange rate and stock prices have both fallen. The Japanese yen has lost its status as a safe-haven currency. Europe's energy withdrawal from Russia is coming too fast, coupled with the pressure of inflation and interest rate hikes, it will soon enter a recession. Bridgewater Fund has been aggressively shorting Europe, and the results will be known before the arrival of this winter. Many of U.S. Treasury Secretary Yellen's views are right. For example, she does not support the Biden administration's large-scale infrastructure plan. She believes that two-thirds of the scale of infrastructure construction should be reduced. Sanctions against Russia should only freeze the assets of the Russian central bank without forcing the ruble to withdraw from currency exchange. Unfortunately, she has been marginalized. The chairman of the Federal Reserve is taking the blame for inflation, but it cannot restore Biden's decline at all. Canada is still running on the road of political correctness. The measure proposed by the Finance Minister this week to combat inflation is to continue to send money. It is obvious that this is to save money to put out the fire. The richest people in Canada will make a lot of money from the skyrocketing prices of food and oil. The people at the bottom of Canada will be protected from inflation under the protection of the white left. The remaining middle class will be the only class to pay for inflation. The cost of living will increase, and debt interest payments will double. They cannot lose their jobs, cannot get sick, and cannot cut off debt payments. From the global subprime mortgage crisis in 2008, to the global epidemic in 2020, and then to global inflation in 2022, Canada is too close to the United States, and all economic policies follow the United States. Canada is responsible for all the troubles caused by the United States. What is even more unfortunate is that the United States has understanding people like Yellen, who have some checks and balances, but Canada does not have any understanding people, and the suffering of middle-class families has just begun.
On the way back from Quebec, we drove through a dark cloud, and my wife and I told us that we were going to be driving into a period of wind and rain. One minute later, the rain started pouring down. We drove forward in the heavy rain with double flashes. Fifteen minutes later, we drove out of the thunderstorm area and saw the sun again. To go home, we must drive onto the mountain road shrouded in dark clouds. The car is our safe haven. We hold the steering wheel tightly in our hands and think about the direction of home. Now I am sitting at the desk at home and writing this text, hoping to tell my readers that although the road ahead is bumpy, we know where our home is and don’t be afraid of wind and rain. This is the only way we can pass in our life journey.
Today I forwarded a video to my friends in the financial business group. It is teacher Wu Xiaobo's recent work "What's Wrong with Us". This video has been removed from the shelves of video platforms other than YouTube. What Teacher Wu said about "brain deletion" makes me feel very sad. When we speak or write articles, we have to delete some words in our minds that we should not say. In such a Chinese environment, finding the conscience of intellectuals is simply a luxury. Netizens helped me open a personal website with this server in Canada because they saw my embarrassment of telling the truth and deleting my thoughts at the same time. Regarding China’s political and economic situation at this time, I recommend everyone to read Teacher Wu’s works. I hope that my new website can gather the positive energy of middle-class families who are concerned about their financial security and are at the waist of society, so that we can weather the storm together.
Henry Wang June 18, 2022