Bond Economics: Canada Muddling

Canadian CPI data came out today, and the general trend is that it is bouncing around “normal levels” for an expansion. Although higher than the average for the 1990-2020 period, no reason to get too excited. Grocery prices have been trending higher on a year-over-year basis (4%) since a low in April. To what extent this is partly the result of turmoil in the United States is not clear to me. Although I am not spending too much time handicapping the Bank of Canada, I lean towards the policy rate sticking near current low levels.

I like looking at nonfinancial business credit data as a coincident indicator for recessions. The idea is straightforward: debt is the lifeblood of financial capitalism, as debt is typically used to finance fixed/inventory investment. Looking at nonfinancial firms strips out all the financial engineering shenanigans within the financial sector. Although business credit growth may have slowed in Canada, it is not showing signs of hooking downwards.

Finally, I just wanted to update the Canadian household debt service chart, which goes to the second quarter. The latest figure is 14.4%, with mortgages being over half of that (7.9%). The interest only component is 8.8% of income. Although doomsayers panicked in the late 2000s about the spike in the chart (I was one of said doomsayers), the brakes were slammed on some of the insane lending policies, and Canadians have muddled through with historically high debt service levels.

By way of background, mortgage insurance is compulsory for mortgages with high loan-to-value ratios, and the CMHC effectively determines the terms of such mortgage insurance. Going into the financial crisis, the mortgage insurance standards were extremely lax — 100% loan-to-value was theoretically possible for a bit (although there might have been safeguards that kept things slightly more sensible). This was a big difference from the stodgy standards that prevailed up until about 1998 — which is when the Canadian house price hockey stick pattern formed. The rise in Canadian household indebtedness should be somewhat kept in context — housing was extremely cheap in Canada outside of Vancouver and downtown Toronto until the “hockey stick” emerged. For example, my wife (girlfriend at the time) bought a house in the suburbs of Montreal for a price that would get gotten you rights to live in a cupboard in London England. This meant that “unsustainable” Canadian debt/house price levels (as based on historical comparisons) were actually in line with places that have sustained similar levels for decades.

There is no doubt that a deep recession would cause more debt distress than usual, one cannot point to debt levels being at some “tipping point.”

U.S. News — Sigh

Our friends in the United States continue to undertake odd actions that may or may not entertain future historians. With data production hit by the government shutdown, it is not easy to read the economic tea leaves. However, having the U.S. Treasury attempting to backstop Argentina looks to be an interesting future entry in the Global Encyclopaedia of Financial Crises. Admittedly, people have a hard time conceptualising the large numbers that show up in government finance and so the Administration might be able to bluff it out, but it is hard to see how potentially losing tens of billions on Argentina’s behalf ends up being a politically sustainable policy.