Today’s post is about something of interest to a lot of people. Earlier this week the Bank of Canada surprised just about everyone with an interest rate cut from 1.00% to 0.75%. The Canadian dollar dropped to the lowest it’s been in years. Over 20 economists were surveyed prior to the Bank’s bomb shell reveal and not a single one of them expected the news, lol. Maybe economists are just there to make weather forecasters look good.
Even our country’s most prolific real estate blogger, Garth Turner, was taken by surprise. Just last week a commentator on his site named BlackDog pointed to a report which predicted this week’s interest rate cut, and Mr. Turner promptly replied to dismiss the report. Not even a best-selling Canadian author of 14 books on economic trends saw this announcement coming. It just goes to show how difficult it is to read the minds of central bankers.
The Rate Cut is good for:
- Debtors who have variable rate mortgages, lines of credits, car loans, student loans, or other types of floating rate debts. Every $100,000 of debt one has will translate to about $20 a month of LESS interest one has to pay.
- Investors in the stock market. Lower cost of borrowing is a type of monetary stimulus that has the same effect of printing money. The U.S. stock market has gained 100% over the last 6 years since it began it’s Q.E. programs.
- Existing bond holders. Lower coupons on new bonds mean existing bonds are worth more.
- Industries like manufacturing, exports, hospitality, tourism, companies with primarily $USD revenue, or any other businesses that benefits from a lower Canadian Loonie.
- People who have debt in general. Lowering interest rates is inflationary which diminishes the value of one’s debt.
- Home owners. Rate cuts drive real estate prices higher.
The Rate Cut is bad for:
- Savers. High interest savings accounts are looking less attractive with the threat of inflation.
- Consumers. Canadians import a lot of food and staple items from the U.S., which will cost more for us with a lower $CAD.
- Cross border shoppers. Trips to the U.S. will become more expensive.
- People living on a fixed income, like pensioners.
- Retailers who’s suppliers are from outside of Canada
Thank you Stephen Poloz for this rate cut. I appreciate your continuing support to prop up the already inflated housing market in Vancouver and increasing my home’s value. You’ve successfully penalized all the savers and risk adverse members of the investing community by lowering the returns on their GICs and term deposits. You have instead rewarded the speculators and heavily leveraged investors, such as myself, by leaving more money in our pockets, and encouraging even more borrowing activity! Hurray for cheaper financing and more incentive to use debt because that’s exactly what Canadians need more of right now. I applaud your push for higher inflation with this rate cut. The 2% CPI in 2014 just wasn’t high enough. I’m sure making it even more expensive to live in this country is exactly what consumers want, especially when more people are out of work now than a month ago.
“We can’t get the numbers to work and would appreciate some help,” pleads Eric, a 41 year old physician who lives in Vancouver, B.C. and makes $300,000 a year. His wife is a dentist and together they typically earn a combined household income of $450,000. Eric regrets “not having bought a house years ago.” He further admits that he has “no pension whatsover.” It’s clear that the couple in this Globe & Mail article has trouble making ends meet.
Furthermore, Eric and his wife do not have life nor disability insurance, which is a dangerous and unnecessary risk, especially when they have five children. With annual expenses totaling $300,000 a year, this desultory family is basically living paycheque to paycheque. So far they’ve put their lifestyles ahead of their financial matters and now, like a crab in financial difficulty, they are starting to feel the pinch. Oh woe is them.
Vancouver may not be the cheapest city to raise a family in, but no amount of money can fix the problem of living carelessly beyond one’s means. Money can buy a lot of things, but ironically it cannot buy financial freedom, which is where financial literacy comes in. Having money alone is not enough to be complacent. Financial literacy is also paramount to our financial security, and helps us discover what money truly represents. Because what does $1,000,000 in the bank actually mean if we don’t even understand the value of money.
We can also learn to spend with value in mind, prioritizing what’s important to us over the non-essential expenses. We can use these strategies to experience satisfaction and the raptures of life without spending an arm and a leg. Unfortunately no one ever told Eric and his wife about this because they spend $24,000 a year on family vacations, and send their kids to private schools, yet they can barely afford to keep their heads above water, let alone save for their own retirements.
Many celebrities, professional athletes, and lottery winners who were once wealthy are now facing financial difficulties. All those people, just like Eric, have one thing in common; they lack basic financial management skills like budgeting, investing, and financial planning.
Medical professionals are some of the hardest working, and smartest people I know. And they deserve every dollar they make. But having money alone clearly isn’t enough. We must also be financially literate to survive in today’s economy. Intelligence and talent will only affect our abilities to earn a living, but they DO NOT determine our aptitude to keep any of it. Hard work leads to money, but financial literacy shows us what to do with the money once we get it.
The discount retailer Target Corp. recently announced that it will be closing all its 133 Canadian locations. Target simply can’t compete in the retail space up here. There are less people in all of Canada than in California, so it’s not worth the investment for Target to stay here anymore. Canadian Targets generally offer few products, and at higher prices than in the U.S. Their inventory problems only add to the negative shopping experience. No wonder traffic is slow at Canadian Target stores. It must be frustrating to go buy some soup, but then find out the store is out of stock.
It will cost Target Canada another $600 million to close down for good. 17,600 employees will lose their jobs and will probably have to set up kiosks in the mall to vend for themselves. At least they will each receive 16 weeks of severance pay.
This is why building up multiple income streams is extremely important. It provides insurance against unemployment. I currently have 4 other sources of income besides my full time job. If I was laid off tomorrow, my other incomes will cover 70% of all my current living expenses. The aim is to get this number up to 100%. I can do this by taking a portion of the money I earn from my full time job, and turn it into an income creating asset such as a private mortgage or dividend paying stocks.
Target Canada Clearance
Target stores will continue to be open during the liquidation process so keep an eye out for reduced prices in the near future. I was excited to see Target come into Canada almost 2 years ago. But I suppose it just wasn’t meant to be. As a shareholder I’m glad management has decided to pull out before they lose any more of my money. TGT shares immediately jumped 3% after the announcement was made to leave Canada.
Target’s stock price has performed well since my initial purchase back in 2013. I’m currently up 16% on my TGT investment. At first this might seem like a decent return over a 2 year period. Many people would be grateful for an 8% annual rate of return. But to be honest it’s actually quite underwhelming. In the world of finance everything is relative. Since I purchased my Target shares, the overall stock market index (S&P500) has climbed 32%. This unfortunately means my investment has underperformed the market. Oh well. Win some, lose some. I believe Target is still a strong company and will recover from its recent mistakes. It still has over 1,800 stores in the U.S. and 366,000 employees worldwide. The dividend yield is 2.8%.
Disclaimer: I’m long TGT.
Random Useless Fact:
Google can graph mathematical equations like a graphing calculator. For example, copy and paste the following line into Google.
5 + (- sqrt(1- x^2- (y- abs(x))^2))cos(30((1-x^2-(y-abs(x))^2))), x is from -1 to 1, y is from -1 to 1.5, z is from 1 to 5
The basic concept of debt is simple. It’s when someone borrows money from another person. But once we start looking at different forms of debt such as sovereign debt, treasury bonds, mortgage-backed securities, demand loans, etc, it can start to sound like a different language to many of us.
Even the money in your wallet right now is just another form of debt. It may not be your debt but if you trace back that money to its initial point of creation you’d discover who’s debt it belongs to.
Year of the Debt
It has come to my attention that there is a lot of misinformation and confusion about the topic of debt on the internet. That’s why I’m making the proclamation that 2015 will be the year of the debt. I dedicate this year to write more about debt and its impact on our lives. I have even created a new section on the blog that’s all about debt.
Most consumers are told that being in debt will hold them back from spending, investing, and living the life they want. But this is not entirely true.
Canadians now have more debt than ever before yet our average household net worth continues to reach record highs. So debt and wealth doesn’t have to be contradictory. In fact, often times debt can increase our financial well-being.Alberta has the highest household debt of any province, but they also have the highest household incomes.