Well kids, you knew the day would come. I’m leaving you all forever to hunt tigers in the Peruvian jungle. Are there even tigers in that particular jungle? I don’t know. I’m not much of a details guy.
Okay, that’s not true. I’m not leaving you guys. Financial Uproar will continue to be here on Monday, Wednesday, and Friday (sometimes weekends too!), but in a slightly different form than before.
Here’s the deal: there are plenty of people who enjoy coming here for the personal finance stuff, but just can’t stand the value investing stuff. If they bother to read the posts, they’ll only skim them. My lady friend is a perfect example of this. Most of the time she won’t even bother to click through to the actual post from her RSS feed. That stuff doesn’t interest her, so I can’t blame her.
So I set out to do something about that, to create a space where the value investors could go and hang out. Thus, CanadianValueInvesting.com was born.
Although it’s currently lacking in content (just 3 posts, 2 of which originally appeared here), it will be the home of all my value investing stuff going forward. If you’re looking for updates on the Uproar Fund, or any other stocks I’m currently invested in, that’ll be the place to go. I’ll continue to talk about more general stuff on this blog, because everyone needs to learn how to invest. Thus, the stuff here will be more about things like index investing, ETFs, and so on. The borrow to invest portfolio will continue to remain here, since it’s not exactly a value investing thing.
Basically, Financial Uproar will have a more personal finance focus, while CanadianValueInvesting will be a value investing blog. The chuckles will remain here, but CVI will probably be more serious. There will be no set posting schedule over there, but expect something at least once a week.
Anyway, I’d be obliged if you’d check it out, assuming that kind of thing floats your boat. The latest post talked about the latest stock I bought, which you can probably guess if you follow me on the Twitter.
Now let’s talk a little about how the Bank of Canada interest rate cut means practically nothing to the average consumer.
For the market, it sends a huge message. If the central bank is cutting rates, that automatically makes stocks more attractive than bonds. The average bond yield should go down on the news, which is exactly what happened.
But something else happened, especially with the many of the major banks’ prime rate — specifically, nothing. None of the major Canadian lenders have cut their prime rate.
The reason has something to do with what’s called the interest rate spread. As rates go down, there’s less room between the rate the bank borrows at (which is pretty close to the Bank of Canada rate), and the rate it lends the money out at. As rates get closer to zero, so does the spread.
Let’s assume a bank can borrow at 0.75%, and lends the money out at prime minus 0.75%. A bank’s spread in that situation would be 1.25%, assuming prime is the Bank of Canada rate plus 2%.
But in a situation where prime is 5%, the bank’s borrowing cost might only be 2.5%. Remember, GICs get more attractive when rates are higher, giving banks access to that capital to lend out. Assuming the same prime minus 0.75% interest rate, and the bank’s interest spread is 1.75%, not 1.25%. That doesn’t seem like a lot, but for a bank that extra 0.5% on $100 billion or so adds up.
None of the major banks have cut their prime rate. Meaning, the cost of borrowing just went down, but the cost the customer pays hasn’t budged. Rate cuts are supposed to spur consumption. It’s hard to do so when prime-linked interest rates haven’t budged. Nothing changes for the consumer.
How is a rate cut supposed to stimulate housing when prime hasn’t gone down? Sure, fixed rates will go down at some point in the future, and we’re likely looking at some spring mortgage rate sales with a 1.xx% handle, but that doesn’t mean a whole lot. Rates have been cut during almost every housing decline in history. The U.S. Fed cut rates during its housing meltdown too. It didn’t help.
Ultimately, it comes down to this. Is there anybody in Canada who said “borrowing at 1% is just TOO EXPENSIVE! But at 0.75%? OH BOY TIME TO BUY BUY BUY.” I’ve never met anyone like that, and neither have you.
The message sent to the market with the rate cut was important. For people like you and I, it doesn’t mean squat. Even if you have a variable mortgage. Although it seems a little contradictory, I continue to encourage Canadians to pay down debt right now, especially in Alberta. The economy is weakening there. The time to strengthen your financial situation is when times are good, even if rates are low.