Capricious

In two days the banker boyz will adjust interest rates again. Three days after that Tariff Man will strike. Or not. Trump has proven thus far he’s capricious, vindictive, emotional, unpresidential, unpredictable, off-the-cuff and almost whimsical. He is unravelling America fast. And getting along with US allies is way down on his list of desires.

If he does whack us on Saturday, as pledged last Monday, the feds say they’ll retaliate. Surveys show most Canadians agree. The recent landmark GreaterFool poll showed similar sentiment. Flip the bird south.

Well, what does this mean for your mortgage, real estate and portfolio?

A great deal, which is why we have to keep talking about the Orange one. He can’t leave anything alone, including a formal trade pact with the two major trading partners of the United States. In a Vegas speech last week he again floated the insane idea that tariffs can replace income taxes, and Americans could get other suckers – like Canadians – to finance their country.

The crowd roared. After all, he’s the president. He can do anything. They believe.

This is a 19th Century approach to economics, briefly resurrected in the 1930s, leading directly to the Great Depression. Global free trade is massively efficient. Jobs and profits flow naturally. The world standard of living is raised. Wealth disparities are reduced, borders less important and prices drop.

Tariffs, walls, duties, taxes, hardened frontiers, protectionism and isolationism are the opposite. Less efficient, so prices go up. So does inflation. Economic growth becomes uneven. Regional tensions rise. Economic refugees and migrants hit the road. Countries have to devote resources to population control where leaders have pledged to protect identity, culture, colour, values. This is a return to tribalism, in reaction to decades of rising globalism. The pendulum swings. The world is moving right. Trump caught the wave. And it’s not going to end well.

So what does a poor central bank do?

On Wednesday it looks like another quarter-point cut, taking the BoC rate down to 3%. We’ll know more after the latest report is published and when Tiff Macklem talks to the media (trust me, he is n-o-t looking forward to that). The cut – if it comes – may be a bit of a pre-emptive strike against the impact of tariffs. But events of the coming week may completely screw up monetary policy, and increase risk for all Canadians.

Tariffs of 25% on Saturday will have an immediate impact, pushing the economy into recession within a few months. Or weeks. Many layoffswill be announced. Consumer sentiment will be impacted. The spring housing market will croak. The central bankers have warned this could bring “an overall decline of about 6 percent in Canadian GDP” as our exports and new investment in Canada is thumped.

Recall that Covid dropped the economy by a little over 2%. This would be Pandemic-times-three. However it’s not just lower investment, less spending, a housing plop and rising jobless numbers that would arrive. It’s inflation – especially if Ottawa retaliates (which it would. 100%.)

In a trade war, nobody wins. “A surge of inflationary pressure that stems from this trade shock would not be ignored,” says our fav economist, Derek Holt. “At a minimum it likely rules out easing as the BoC focuses upon its 2% inflation target. It may—and probably would—come to drive further policy tightening if the assumptions of 25% tariffs on both sides prove to be valid.”

So tariffs = response = inflation = higher interest rates. And you can imagine what that means for real estate.

The cost of money could increase dramatically, say economists. From a possible drop back to 0% mortgage rates if we have tariffs + deflation and no retaliation, to a return to 6-7% home loans if Canada and Trump duke it out.

Here is the forecast for Trump tariffs and no reply by the federal Libs:

The economy would be tossed into recession, unemployment would rise, pricing power would be crushed, taking inflation down with it. That’s a recipe for combined monetary, fiscal and regulatory easing. The Canadian dollar would tumble. In such a case, the policy rate could easily go below neutral and below anybody’s present forecast depending in part on the degree of fiscal easing.

And here is the scenario if Ottawa fights back:

Now that’s a different tale and a much bigger threat over time, depending upon the form of retaliation. Import tariffs applied by Canada would raise prices paid by Canadians. A greater tumbling by the currency would add price pressures. Supply chains that are still at a nascent stage of being revamped at home and globally would be severely disrupted in a version of the pandemic. Tariffs rippling through US industry in the context of capacity pressures would result in pass through stateside and create trickle through effects across supply chains into Canada. The outcome would strain the ability of the BoC to achieve 2% inflation, thereby requiring incremental tightening especially with signs core inflation and wages remain hot at the margin.

In short, this is nuts. Unhinged economic policy. But it gets cheers in Vegas. It depends on how one man feels when the valet wakes him Friday morning.

Then again, he might just invade. Miss Kamala yet?

About the picture: “I’m heeding the urgent call for more feline pics,” writes Juve. “This is Tut. She loves perching at the top of her post, but as Tut… widened her stance, balancing got tricky. So, we got her some rump support, and voilà—one happy cat. Thanks for the daily dose of wisdom and entertainment, much appreciated!”

Blog Note: Readers may have detected a dangerous shift to the left (cats) in recent days. You can allow this to continue, with unknown consequences, or step up and send some fresh canine material. This is a crucial time. It’s in your hands. Act accordingly. The address: [email protected].

Source: https://www.greaterfool.ca/2025/01/27/capricious/