Will interest rates move higher next year?

Yes, rates will probably be higher in 2022. But not as much as people might think.

Inflation is stubbornly high.

We’ve been above the Bank of Canada’s target rate of 2% since March, and the rising cost of living doesn’t seem to be even slowing down.

 

This prompted the top economist at Scotiabank, Derek Holt to predict interest rates will grow 8 times in 0.25% increments over the next 2 years.

 

That seems like an aggressive move. And he’s not alone.
Financial advisor Garth rates-are-going-up-soon Turner, mentions that “most economists” also believe in 8 rate hikes.

Personally I think that’s all baloney. πŸ˜‚

How did they come up with 8 hikes? Why not 7 or 10? I don’t know what model these economists are using, but I find it very hard to believe rates can go up more than 4 times before 2024.
The reason is obvious. There’s too much debt.

Household debt has ballooned past $2 trillion.
Provincial net debt as a percentage of GDP has doubled in BC and Ontario since 2008.
The Federal debt to GDP is now 30% higher than it was in 2017, when the BoC started to raise rates.
And it only managed to get 5 hikes in before the economy needed further stimulus again. πŸ˜…

We couldn’t handle more than 5 rate hikes before. I don’t see how we can possibly withstand 8 rates hikes now, when there’s more private and public debt than ever.

Private debt is now over 300% of GDP. This includes mortgages.

 

So how can we get out of this mess?

Well we’ve been in a similar situation before. Post World War 2 there was also a lot of debt.

The country reduced its debt burdens by financial repression. This basically means allowing for inflation to run a little high, while keeping interest rates relatively low. The 10 year government bond had its yield suppressed for over a decade after the war ended. Eventually the economy grew and the debt-to-GDP ratio declined.

History has a tendency to at least rhyme. So I wouldn’t be surprised if savers get hurt, and debtors get help this time too. πŸ™‚

 

So what does this mean?

I don’t know about you, but here is what I’m doing.

 

Continue to choose variable rate mortgages over fixed rate.

Fixed rate mortgages stink.

Why?

Because they never change. πŸ˜€

But also because historically speaking borrowers end up paying more for choosing fixed over variable. The difference between the two right now is about 1.00%. That means rates will have to rise 4 times (0.25% each time) in order to just break even. Personally I think 4 hikes is the max over the next few years.

 

Negative real interest rates are probably here to stay for awhile

If policy makers choose the financial repression path then expect real rates to be suppressed for years to come. They need the cost of borrowing to stay low to allow economic growth to catch up. πŸ™‚

 

A change in focus into value and commodity stocks.

I’ve mentioned it earlier this year, but I’m buying more value stocks and less growth/tech stocks. I think over the next 10 years value stocks should provide better risk adjusted returns. These are companies such as Berkshire Hathaway, Fortis and other utility companies, and financial institutions like banks.

I’m also buying more commodity stocks, and cryptocurrencies such as ETH and Floki Inu. πŸ™‚ I will write about these investments in next week’s post.

 

Of course I could be wrong, and by the end of 2023 interest rates could be a full 2.00% higher than today. But I just don’t see that happening, lol.

Here’s another way to look at it. My mortgage payments would go up by about $2,000/month after 8 rate hikes.
My wife and I are fortunate enough to be financially independent and we can afford the extra cost. But many other mortgage payers can’t.

Even for those who can, they may not have any disposal income left over for discretionary spending like ordering take-out, or going shopping.
Lower consumer spending will lead to recession which the BoC certainly does not want. πŸ™‚ That’s why I only see 2 to 3 rate hikes over the next couple of years.
Maybe 4 at most.

 

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Random Useless Fact:

 

 

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Sridhar
Sridhar
11/08/2021 9:45 am

Looking forward to the future posts on cryptocurrency. Cryptos seem to be a good option as a store of value as dollar and other traditional currencies are getting debased and savings are not even covering inflation.

DreamingOfDividends
11/08/2021 4:20 pm

I agree that value stocks are the way to go at this point. I invest in crypto indirectly by owning shares of Coinbase. I finally broke even today :D.

David @ Filled With Money
11/08/2021 6:49 pm

Remember in 2018 when we had a trade war going on and Powell ignored all of that and chose to raise interest rates anyway and the markets went into a spiral? If Powell stays, things like that can absolutely happen again, though I don’t think it will be likely.

I’m just so worried… There’s too much cheap money and the last time there were so much cheap and easy money out there, 2007 – 2009 happened. Although the credit standards are significantly higher today than before… Who knows what is brewing today that we’re not even seeing?

Brett
Brett
11/09/2021 7:26 am

What exchange do you use to buy your crypto? Mine doesn’t have Floku INU

Ryan
Ryan
11/12/2021 3:18 am

I’ve followed you for years and just recently β€œrediscovered” your blog. Thank you so much for the excellent information. I can’t wait to read what’s coming next.