Well, this week I was treated to a presentation by a senior economist with one of the larger banks.

The world these guys live in is just fascinating. In listening you quickly realize that almost everything is connected in some way to the markets.

The summary after his talk was, if I had to wake you up in the middle of the night and ask you what the major things were that we need to worry about in the market today, what would you say?

The answer 3 things. Inflation, economic momentum and the dollar.

The man is obviously a teacher as he stepped through one by one each indicator, what they meant, how they related to one another and how they effect each other.

In a previous post, I talked about bond yields and how when sold as a result of lack of confidence in the real estate market translated to changes in the 5 year rate.

According to this gentleman, what I said was partially true. He said that the 5 year rate is always the leading indicator for the market place. When investors get nervous, the 5 year goes up. None of the other rates do, just the 5 year. The other rates follow, but usually much later.

Inflation. Inflation is up. But as I have learned, inflation is a lagging indicator. The reason behind the rise in inflation is not due to the price of goods rising, but more now to the cost of rent increasing. The reasoning here is prices went up due to the low rates & everyone buying. With the increase in price, folks start to think they can’t afford that house anymore, so they go back to renting. Demand on the rental market goes back up again an so does rent & the inflation rate with it. Cool huh?

Next is the economy. What’s happened in the US is that people have stopped using their home as an ATM machine and withdrawing more and more of their equity. On the one hand that’s a good thing, stop incurring more debt is good. On the other hand, this also means that folks have stopped spending. Or to state this slightly differently, people have switch to saving money. So the US has gone from spending every dollar in equity they had and creating a booming economy, to now almost a complete reversal where no one is spending and everyone is saving. Couple this with the real estate market being, well to put it nicely, deflated and you have what is know as a slow down in the economy.

The interesting thing to note here is that for the first time in 40 years, when the US economy is slowing the rest of the world hasn’t followed suit. The global economy is still going strong, up some 6% in growth. Thanks to China (no real surprise there), Japan (finally, they’ve been waiting a long time) and the European union.

The Canadian economy is doing OK. For the most part, being a conservative bunch, we haven’t opted to spend most of our home equity. We’re still primarily savers.

Given the economic slow down, the rise in inflation, right now it looks like the Federal reserve will be looking at reducing rates in order to try to stimulate spending to get the economy started again.

Finally, we have the dollar. Recently, Canada has been seen as slightly more stable than the US and hence the rise in the Canadian dollar against the US. The problem with the rise in the Canadian dollar is that it hurts our manufacturing industry, as we’re not able to produce goods as inexpensively. As a result sales drop, manufacturers pull back and layoffs start happening. With layoffs, fewer people spend. Less spending the economy slows.

So if the Federal reserve drops its rates, Canada will have to follow suit. If we don’t then our dollar will rise. As well, the prediction is that our dollar will rise in the near future as the world discovers again that we are rich in natural resources. Take uranium as the best example. We are the economic equivalent of Saudi Arabian oil when it comes to uranium. Guess what the world is doing to generate more power? Coal is no good as the green house gases are, well politically incorrect with countries trading for carbon credits to meet their power demands. Everyone is moving towards nuclear power plants. Even Texas has decided to change from creating several new coal fired plants to nuclear stations. China sees this as the only viable solution long term.

And the price of uranium has been steadily rising and almost doubled in the last 5 years. The demand is there & rising. That’s good for our economy, but that implies a rising dollar as well.

All this to say, short term it looks like rates will stay the same or even go down slightly. For those with variable rate mortgages, you can relax now. The bank of Canada seems to be in a state of utopia for the time being.

A follow up to a previous post.

Last time we talked about paying on time, or even before the due date to help your credit situation.

Time now for a few more rules of the game.

How much credit have you used and how much do you have available. If you said “lots and none”, this may be a small problem. Don’t get me wrong the banks love you if you’re doing the right thing and paying each month. They are making a boat load of cash off of you. But this discussion is not about how the banks make money, but how to save you a few bucks.

So, you have and use most of your credit. Ok, but PLEASE make sure you NEVER exceed your limit on ANY of your cards. Why? Back to Mr. FICO score again. It seems that the whole scoring system takes a nose dive if you decided to exceed your limit and leave it that way for 30 days.

I’ve seen it. I looked at one persons score and couldn’t figure out why the score was SO LOW. Everything was up to date. Paid on time. No collections. Long history with most of the cards. Clean. Then I looked at the limits. Close on one and just over ($20) on another. As a result of this one card, her score must have been 100 points lower than I estimate is should have been. Quick fix, pay it down as quickly as possible! Get it below that limit and keep it (well) below. The other, what I call backward approach of course is to raise the limit by $100. I find this gives folks a false sense of security.

Two things, always try to keep your current debt below 75% of the limit or paid off completely (much preferred) and whatever you do don’t exceed the limit. I’m telling you, it will cost you in more than one way.

Got old credit cards? If they’re active KEEP THEM. The longer your credit history the better. It only counts for a small portion of your total score, but why have it count against you if you don’t have to? That old card you got when you graduated from university, when you thought no one would give you a card. The one with the 28% interest rate. Don’t hold a balance on it or anything ridiculous like that, but don’t toss it away either. Use it once every couple of months for a quick purchase (something you had planned to purchase already) & pay it off. Simple. Effective. Adds to your over all score.

Everytime you got to a major concert/sporting event and fill out an application for a credit card to get that fee t-shirt (or cheap item de jour) and get approved. STOP!! It is possible to have TOO MANY credit cards. Even if you don’t use them. I had one customer with 8 different cards. Never used. All with significant limits. To the banks and lenders, this becomes a significant risk. Why? Their “reasoning” is that the client could decided to go on a shopping spree and use up all his credit at once, then he wouldn’t be able to afford his mortgage payment.

Good rule of thumb, a minimum of 2 active credit lines and a maximum of 6. This would include a car loan or some form of installment (regular monthly payment) loan.

And finally, how do you know about any of these things going on with your credit card? Check your own credit score. The cost to you up front (say $30) will save you potentially $10,000s in the long run in higher interest and premiums.

Those are the important rules to follow. More to come as I come across them on a regular basis.

I’m going to try and give a slightly broader perspective this time.

In the past, I was trying to close a commercial deal. At that time I was asking advice from another broker about rates. He said that commercial rates are dependent upon what the current bond rate is. At the time I was curious and looked into what the bond rates were and didn’t really think much about it. A point of reference for the next time I do a commercial deal.

As time went on, I noticed people talking about bond rates and how they affect (or effect? one of those fun English words I never did learn the correct use of) various aspects of the market.

In the last few months, I’ve been receiving daily updates on the bond market. I’ve been watching it trying to see any kind of trend. What I noticed initially was the regular up and down motion with a spread of about 0.1%. Then I remarked that they broke out of that cycle and started to move upwards.

My initial thought was, interesting, bond rates are going up that must be a good sign. People are investing in bonds.

Funny how sometimes you guess at what you don’t understand at all and come up with the exact opposite conclusion to reality.

I finally got the inside scoop on this one. Interest rates started to rise (seemingly overnight) and I was scratching my head. Why now?
What I was looking at were bond yields. The yields only increase when bonds are sold. As they sell, there are fewer entities who own the bonds, as a result the return for those still holding them increases (as there are now fewer entities to divided the return or yield for these bonds).

At a micro level, ya so what? Bonds are being sold. Big deal. The real question is, why are they being sold (macro level)? The answer, lack of confidence in the market. In this case, the housing market. Lack of confidence in the housing market means it’s time for lenders to raise rates as this is an indication that the folks on the federal side will be looking to increase the prime rate in order to restore confidence in the market. The lenders wouldn’t want to be caught behind any prime rate change.

What will be really interesting to see is at what point the federal level starts getting pressure to raise rates. Lenders have effectively raised their rates by 0.2% in anticipation. Will they drop by as much if the prime doesn’t change in the next 3 months?

Will the Canadian prime rise in lock step with the US prime? The US housing market is going through a rough spot right now. Large inventory. Prices not rising, but if they are not rising and not selling effectively they are decreasing slightly. The  Canadian market has slowed slightly, but not to the same degree as the US. Certainly not in the boom towns in Alberta. We are tied at the hip when it comes to our economy, but we tend to be much more conservative in Canada. The consensus seems to be a housing market correction (possibly a stock market too) is coming. The hope is that our conservative nature will help us avoid most of the pain that we think our neighbours are about to experience.

Only time will tell.