Canada Teetering On The Edge

28% of Canadians fear bankruptcy ahead of Bank of Canada decision

 

With just two days to go before an anticipated interest rate hike by the Bank of Canada, one of country's top bankruptcy firms is warning a "staggering" number of Canadians are on the brink of financial disaster.
Twenty-eight per cent of respondents to a new survey, which was conducted on behalf of MNP from June 15 to June 19, said another rate increase will hurdle them toward bankruptcy, while 42 per cent say if rates rise much more they'd fear for their financial well-being. While both readings were down modestly from the previous quarterly survey, that's not lessening the alarm.
"When you look at the staggering number of people who are teetering on the edge, it’s clear that we are going to start seeing a rise in delinquencies as rates rise," said MNP President Grant Bazian in a release.

  My view:

Canadians have been living on borrowed time in terms of the inexorable rise in assets prices, housing in particular.  While the housing market was crushed in many US states in the 2006-2009 time-frame, Canadian house prices suffered little decline.  Continued excess has driven prices in most major cities to silly levels.  Vancouver and Toronto are at the top of the list of ridiculous valuations with Vancouver topping at 13 times average annual income.  While most other cities are also far above sustainable levels, interest rates are now creeping higher.  If one watches the interview in the link above, toward the end of the session is an interesting comment.  If rates are at 1%, than an increase of just half a percent in rates to 1.5% has the impact of a fifty percent increase!  This is the source of the trouble brewing for overleveraged Canadians.  If it is true that 28% are in such dire straits that a small mortgage interest increase would cause insolvency, the Central Bank will be hog tied to low rates in perpetuity.

Why?

Because the big government system of leveraging everyone to the hilt can not accept or permit deflation.  It is truly a ponzi scheme that assets prices must always rise to keep up with ever increasing debt levels of individual citizens, corporations, and municipal, provincial and federal governments.

The bond market is sensing this as the long term 10 year bond rates stubbornly refuse to rise much, while the short term (2 year) rate continues to rise as Central Bankers talk nonsense about raising rates.  American rates are now within 29 basis points (0.29%) of inverting the yield curve where short term rates exceed long term ones.  Who cares states the reader.  We should all care as when this happens a recession is essentially guaranteed.  And the problem with Central Bankers, is they are out of bullets as interest rates that have not risen much can't be cut much either to "stimulate" the economy. 

We need to understand that bad debt will not be repaid because it can't be repaid.  This is why we have bankruptcy laws for individuals and corporations.  Municipalities can default on their debt, but bankruptcy laws are quite opaque regarding dealing with government defaults.  Provincial defaults are even more serious, and Federal defaults are typically dealt with by currency devaluation as we saw in the United States in 1934.

The ponzi scheme of big government spending is coming to an end thanks to the inevitable deflation brought on by debt defaults.   When sanity does return to the market, expect high quality assets, and gold in particular to soar.