Adapting to Prolonged Low Interest Rates

Last Fall I made some bold predictions that low interest rates are staying until 2016, which will keep the housing market stable. I also suggested that investing in parts manufacturers like Magna International would be a profitable venture due to the consumer’s love for cars ๐Ÿ˜€

Fast forward to today and it looks like events are unfolding thus far ๐Ÿ™‚ The Prime lending rate is still at 3%, unchanged from last year. Mortgage rates have not moved higher. Home prices have not corrected. And Magna International’s stock price is nowย 25%ย higher since last year’s post.

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Anyway, the International Monetary Fund (IMF) recently published their growth projections for countries in 2014. Canada’s economy is expected to grow at 2.3% this year, lower than that of the U.S. at 2.8%, and the U.K. at 2.9%.

So we must create a plan to make the best of this current economic situation, because if we fail to plan – then we plan to fail ๐Ÿ˜‰ The following image demonstrates the importance of planning ahead. Can you figure out what’s wrong with this sandwich?

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Today I will make some more predictions ๐Ÿ™‚ I think the overnight lending rate in Canada, currently at 1%, will increase to 1.25% in 2015. And by 2018, it would only be at 1.75%. Since rates are going up so slowly I would continue to own instead of rent, because I think the national average real estate price will move higher in the next few years ๐Ÿ˜€

I also advocateย variable rate mortgages for new home buyers or those who are renewing their existing mortgages. The premium paid for a fixed rate mortgage may not be worth it ๐Ÿ˜•

The other thing I would do is increase my international financial exposure by investing in the U.S. or buying foreign currencies.

I would also plan to stay in debt longer and prioritize on financial growth and expansion since it’s been well documented that wealthy people believe more in building up wealth than in paying down debt when rates are expected to be low for some time.

And lastly, since I believe the Canadian dollar (currently at $0.92 USD) will drop even lower by 2015, I would continue to invest in export based companies likeย Magellan Aerospace Corporation (MAL) and of course, Magna International (MG), both on the Toronto Stock Exchange ๐Ÿ™‚

I know a lot of people will have issues with my economic predictions because they DO think we’ll witness a housing correction and believe new buyers should wait and continue renting for now. They thinkย fixed rate mortgagesย are better, even though variable rates have been historically cheaper on average. They think the Canadian manufacturing sector is weakening, especially after so many good jobs were lost in Ontario recently ๐Ÿ™ And they think it’s best to get outย of debt ASAP. Well if they’re right, and I’m wrong, then I will probably lose a lot of money ๐Ÿ˜

But oh well. YOLO right? Sometimes unconventional and risky strategies pay off the mostย (ใ‚œโˆ€ใ‚œ) Will my bullish outlook bring me closer to becoming a millionaire, or backfire and cost me a fortune? Who knows ๐Ÿ˜• I’ve been right in the past but maybe it was just dumb luck ๐Ÿ˜› So as usual, we must all do our own research and create our own financial plans ๐Ÿ˜‰

Random Useless Fact:ย Cats are liquids.

“Liquid” (noun): Aย sample of matter that conforms to the shape of a container in which it is held.

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04/09/2014 4:07 pm

I agree with you Liquid. I also think rates will be low for another 5 years.

What I’ve noticed is that many people think that the central banks are going to wake up one morning, and decide all the sudden that monetary expansion was a bad idea, and that the best way to return to growth is monetary contraction along with one hell of a massive correction in assets.

The central banks have received every excuse already to raise rates, and they have not. Why would they change course all of the sudden and return to Austrian School of Economics fundamentals?

I knew a guy who thought he was going to buy a house dirt cheap after the massive correction was going to come in 2008… He is still waiting…

p.s. You buttered your sandwich on the wrong side!

Max Dent
Max Dent
04/10/2014 2:26 pm

Looks like you’re getting bolder and bolder in your investment decisions. At least regarding experience, that’s always good.
Cool post anyway, I wish you lots of luck ( or rather well calculated decisions). ๐Ÿ™‚

04/10/2014 7:36 pm

A song by one of my favourite bands comes to mind… Your Gonna Go far Kid (The Offspring) – Cheers.
ps. The bread was sort of triangular, so I bet it would have almost fit…

Laurie @thefrugalfarmer
Laurie @thefrugalfarmer
04/11/2014 3:18 am

I’m embarrassed to say that as a big time cat lover that I had no idea cats were a liquid! Shame on me. ๐Ÿ™‚ That sandwich looks yummalicious, BTW.