Not if, but when...
For the last 5-6 months, I've been telling anyone who would listen that the USA (and subsequently Canada) is due for a major recession.
Since the beginning of the "Great Recession" that sent the stock markets tumbling in 2008, the US has not only recovered but they've been on a "Bull" run ever since. We are currently experiencing the longest one in history (see chart below) and there's a reason for that...
The "Bull" in the China shop...
When Trump took office, the U.S. economy was already in excellent shape, despite having sold his disciples a bag of goods that the economy was a "total disaster". However, nothing could have been further from the truth (as the dow chart below shows).
It's true the US economy has gotten stronger over the past 2 years, but that is mostly due to unsustainable and short term tax cuts. The $1.5 Trillion in tax cuts introduced by the Republicans were sure to increase jobs and growth, but adding this type of debt to your countries credit card is extremely unsustainable.
Here's where it gets tricky:
Last fall, the Republicans lost the power of the House of Representatives to the Democrats and because they would require the majority of both these arms of government to implement any future budgets, the opposition now have enough seats so they will never allow another budget like this to get passed. This means there will be no more "fuel" to add to the fire after 2020.
Take a look at the history of the Dow:
Notice the grey areas, these are the previous 3 recessions over the past 30 years. If we're using history as a guide, we all know, what goes up, MUST come down. Never before has the predictability of North America's future recession been so crystal clear. My advice is to proceed with extreme caution, now is not the time to continue to seek growth in your retirement portfolio, it is a time for protecting what you already have before the markets start to fall.
The chart below shows the current U.S. bond yields - which you'll notice are dropping, extremely fast. In the past, these yields have been extremely accurate in predicting recessions. The rule of thumb for a chart like this indicates that within 100 weeks of a sustained inverted yield, North American will be in a full blow recession. It's not a question of if, but when.
This link from CBC all but confirms it.
When the stock market correction inevitably happens, what will follow is a massive slowdown in the US economy, followed by an increasing month over month job losses. This of course will have a direct impact to Canada's exports, and the tens of thousands of manufacturing jobs that are mostly connected to upper Canada. Make no mistake, when the USA sneezes, Canada ultimately catches their cold. It will ultimately lead to our own economic slow down and job losses.
One of the first mechanisms the Bank of Canada will use to offset a slowing economy are rate cuts. This is good news for anyone that is on a variable rate mortgage as you'll be able to ride the wave back down saving thousands.
How do I take full advantage of this?
Fixed Rate Bank clients will have to sit this one out. Especially, if you've locked into a 4-5 year fixed rate term in the last couple of years. If your mortgage is held by one of Canada's big 5 banks, there's really no way for you to take advantage of the ride back down. At least not without taking a sizable upfront hit. Many of you know, that chartered banks fixed rate mortgage products come with significant penalties attached to them. This would offset any future savings - depending on how much is remaining on your term. You might have to wait out any savings available today and hopefully pick some up at a later date.
For more on Interest Rate Differential Penalties click here
Mortgage from the big banks consistently cost borrowers more
GREAT news for Variable Rate mortgage holders...
However, if you still have 2-3+ years remaining on your term, I fear you'll be renewing into a different scenario than you could be taking advantage of today. What I mean is that most variable rate mortgages from just a couple of years ago were offered in the Prime - .35% to Prime -.50% range. Today, these discounts have doubled, so you can now take advantage of these much lower rates at a minimal cost. This will get you well under the prime rate (and well insulated) for an extended period of time as it starts to drop.
During recessions, money becomes scarce. Back in 2009, the Canadian mortgage industry pivoted from seeing aggressive discounts during stable times (just like we are seeing today), to a premium placed on the variable products. Back then, we went from a prime minus 1% situation to prime plus 1% within a span of about 60 days. When the dust settled in 2010 the variable products were not much better than the fixed rate products of that era. It took about 2.5 years for them to recover to their pre-recession levels.
The cost of doing nothing
I've spent the last 90 days implementing the above strategy for my many of my current clients and so far the average savings per month has been $127 per month. When added up, this turns into $7,620 over the next 5 years. I'm sure you would agree this would be a fairly sizable chunk of savings put back into any families budget. Especially when the alternative is just continue paying those same funds to your lending institution.
There's no denying that the cost of borrowing is going to decrease considerably over the next 24 months, but as the prime rate falls, where would you rather be? 1% under it, or 1% above it. If you fall into the former, the time to act is right now.
Mark Norman has been an Accredited Mortgage Professional (AMP) since 2004 and during that time has helped thousands of clients finance homes all across the country. He is an unbiased and educated local voice on all things mortgage related in Canada. If you are looking to implement an actual strategy (like above) to your mortgage borrowing, and want someone in your corner that is constantly looking for ways to keep more of your hard earned dollars in your pocket. Look no further, you've found your guy. To discuss your situation, you can reach him via phone (709)743-3939 or email: mark@normanlane.ca
