Housing Forecast Seminar: Live Blog

The Canadian dollar should fall into the 50 cent range over the next few years starting this Friday when the Canadian dollar will get hammered.

Tony- get serious man. This is the way the world works:

If the outlook for a commodity (ie stocks, bonds, houses, CAN dollars) changes such that an increase or decrease in future price becomes likely or certain, by the time you know about it, it's too late to take advantage of it because the price change is already built in, subject only to a discounted future value calculation and a probability coefficient (ie. if something MIGHT be going up in price one year from today, it will start to go up immediately but at a lower rate than something that DEFINITELY will go up next year, which will basically increase in value to the full amount it will be worth minus an "interest" return that a current buyer expects to gain by holding it for one year). Liquidity of the asset also has an impact on the speed of the price change.

For example, if it suddenly became nearly certain that the loonie was going to 50ct US in one year, it would go to 49 or 50 cents tomorrow because everyone would dump CAN until the selling pressure forced it there. It wouldn't go much lower, because why sell something for 48 cents when if you hold on it will be worth 50cts so it provides a floor. Likewise, people will continue to sell at 51ct until it forces it lower because why lose 2pct more?

However, if there is a CHANCE of it dropping to 50cts based on every factor you can imagine that influences the macroeconomy, it will drop slowly and relative to the probability of its future decline. No one will sell it for 50cts before it actually hits 50cts. Why would they, they have nothing to lose by holding on longer if they know that's the floor. Those that hold on or buy at say 60cts may be rewarded with a rebound if the CAN doesn't drop more and goes back to 70cts, or they may lose money if it continues to sink lower. This will naturally pressure the CAN lower than its purchasing power in a declining forex market, because people who are buying CAN do so with the expectation of an increase over time (investment return).

Anyway, you can substitute pretty much anything that can be bought or sold for CAN in the above, but the point is that once the actual, rationale, realistic future price (aka supply/demand balance) of an asset changes, that change if factored in immediately. The CAN is worth 75cts USD exactly because that is what it should be worth right now; it is not "mispriced". The best estimate of future prices are today's prices, therefore I predict the CAN to be 75cts USD this time next week or next year. I keep offering real dollar wagers for dinner but no one seems to want to bite. I'll bet you a supper that it's closer to 75 than 50 Jan 5th 2018.

Just curious Trev. I'm not talking about short term Cad dollar outlook but long term. So in your opinion for the Cad dollar to go back to par with US dollar or a least to be in the 90 cents range how long might it take for that to happen? I mean 2 years, 5 years or longer?

Wally, currency exchange rates are not a function of time. They are a function of economic forces. If we knew with a good probability what they exchange rate of CDN to USD would be at a certain point in time everyone would buy or sell the currency until it reached that point.

Honestly Wally I haven't the foggiest when (or even IF) it will go back to 90cts, but I can offer my opinion on WHAT would be necessary for it to have a chance at 90cts or higher. A lot of things affect that balance, but a few key ones:
-The world's need/want to purchase of Canadian vs. US goods and services. If people are screaming for Canadian G&S, then they are also in need of CAN to purchase those. One of the reasons we enjoyed near parity for much of the last decade is the commodities boom that meant a huge amount of export revenue, i.e. need for people to purchase CAD. That's not just Oil and Gas, it's all kinds of things- potash, metals and minerals, even technology, where we enjoy world-leading businesses in the resource extraction sub field. Take a look at this graph: http://www.tradingeconomics.com/canada/balance-of-trade
Assuming it's correct (tough to trust anything on the internet these days unless familiar with the source, in this case I'm not it's just the first that came up in a google search) we've slipped into the worst trade deficit vs the rest of the world we've seen in a decade, starting in late 2014 (Guess what happened to commodities at that time?) Our dollar has followed suite. Our dollar has also rebounded a bit lately, and it's not surprising it coincides with the first net trade surpluses in two years. So the trade balance factor (i.e. demand side of CAD supply/demand balance) is a big one, and how this changes depends on how you think Canadian goods and services will be in demand in coming years. Do we return to a commodities bull market? Does our economy diversify further and our businesses find ways to compete stronger in other industries such as tech, medical R&D, manufacturing, or otherwise such that people see more value in Canadian G&S vs. options available from other parts of the globe? If so, then CAD will go up, other things being equal. For now, we're at 76 cts (higher than Wednesday when Tony predicted we'd start getting "hammered" today") because it prices our G&S appropriately- any cheaper (say say 75 cts or lower) and we'd be more competitive, people would buy more Canadian stuff, need more CAD, and push the price back up to 76cts. Any more expensive (say 77cts or higher), and maybe our tech industry would lose business to developing world, so people would sell more CAD to buy Rupees and it would push our dollar back to 76cts.
-Money supply and inflation. The fractional reserve banking system employed by most developed western economies is about as easy to understand as General Relativity, akin to voodoo and Quantum Entanglement. Jokes aside, it actually does a pretty good job of maintaining the value of our money when managed accordingly. Inflation in Canada has been low for a really, really long time, which has allowed once in a lifetime low borrowing rates to persist and help support the economy. The US is heading into a period of potentially higher inflation relative to its previous 8 years. Thus, the Fed has already started raising rates, and will likely do so again once or twice this year in order to tame those inflationary pressures. Personal opinion: I see Canada as very “steady as she goes” with respect to inflation because I don’t see major volatility risks, but that’s just my opinion. As for the US, I see volatility risk of both higher inflation (i.e. CAN would rise relative to the US dollar) and higher interest rates (i.e. could cause CAN to decrease relative to USD). So how they manage that balance will determine which way it goes. For now, the average of all worldwide predictions is that over the medium term the money supply and inflation on both sides of the border will balance out to a CAN:USD ratio of 0.76
-Reserve Currency status (aka “Safe Haven” status). In an uncertain world, people want to own something they believe is stable and a safe store of value. Whether that’s a house in a peaceful constitutional democracy, farmland in Saskatchewan, mining rights for an copper mine, a government bond, or a brick of gold, the point is that that they believe it has inalienable, intrinsic value that is not likely to decrease (or at least decrease relative to other potential stores of value). Money only has value because we all agree it has value; it’s obvious you can’t eat it, wear it, or sleep under it but we all agree that it can be used in differing quantities to acquire our basic needs and fulfill our wants. The USD has been the world’s safe haven currency for longer than I’ve been alive, and I believe it will continue to be that way for many, many years to come. That said, just HOW safe the USD is as a store of value fluctuates daily, and is always based relative to other assets. Major international conflict? USD is going up relative to all others, CAN included, because they are the last remaining superpower. Unpredictable narcissist in the Whitehouse that has promised to fight globalization, impose trade barriers, and establish protectionist policies? USD goes down. Probably. Maybe. One mustn’t forget that America’s capital markets are the most liquid, safe, and accessible in the entire world- If you’re Mexican and can no longer make money by selling cars to Americans because they’ve repatriated the auto industry, you may elect to purchase equity shares in a publicly traded property management firm with large holdings in the US rust belt, because you expect people and jobs to flood back. Thus, you purchase USD in order to invest in said property management firm, driving up the USD. And nobody, ever, EVER, is going to interfere substantially with the liquidity of the US capital markets- it doesn’t matter if your name is Kim Jong-un, you can purchase equity in Lockheed Martin (caveat: I do believe there are certain stipulations around foreign ownership of American defense contractors specifically, so the joke is a bit tongue in cheek). Essentially, there’s a lot of ways to trade in America that don’t involve trading with America. I believe there’s volatility risk in the exact level of safe haven status the USD represents right now as everyone tries to figure out what the new President is going to do on trade, but it’s a measure of percentages not huge jumps up or down and I know two things: The US has the single best separation of powers/checks and balances system of any nation on earth, and their Congress will not let him torpedo the country. Best guesses for how the CAD rates vs. the USD as a store of value going forward: about 76:100

I know that doesn’t answer your question at all, and maybe you were looking for my personal opinion on the matter as to whether I think 76cts USD is over/under what I think it will be going forward, but I’m really not into ForEx enough to have much of an opinion. What I really enjoy though is the opportunity to talk about market timing and market predictions- whether that market is ForEx, equity markets, bond markets, housing markets, or the cost of any asset really. Market predictions are fascinating, but they’re usually worse than weather forecasts. And if they’re right, it’s probably just chance. If you get the time, do some reading on efficient market hypothesis (EFM), it’ll change your life and give you a different perspective on the financial industry. Doesn’t mean that EFM is always right, but it’s right WAYYYY more often than it’s wrong, although I do believe that on a microscale there is always alpha (another equity market term) to be made by a savy investor. But usually, that alpha has to be the result of some actual work (ie. Individual, hands on, personal observation information gathering) by the investor; any “work free” alpha gained by following your nephew’s hot stock tip isn’t alpha, it’s luck. However, going to view 50+ houses a year, and buying one of those houses every two or three years because you dispassionately notice or discover something about it (location, siting, condition, layout, zoning, redevelopment potential, seller motivation, etc, etc) that sets it above the hundred(s) of others you look at relative to price point, is probably a good example of actual, real, attainable alpha in the housing market. Even then though, keep in mind there are thousands of other people out there doing the same thing just in Edmonton, and you’d better have a strategy to differentiate yourself or again you’ll be paying $X because it’s worth $X, and you’re not going to be able to flip it for $1.10X like you want to. It’s why I have such a hard time understanding people who say “the housing market is going down by 20%” or “up by 20%”; what do they know that the rest of the entire world does not? Sure, events like regulatory changes (i.e. new mortgage rules) or tax changes (i.e. foreign buyers tax or vacant property tax) or a macroeconomic shock (i.e. Oil falling from $100$25/bbl) can change the market swiftly, but none of the internet prognosticators out there find out about these things in advance, they find out the same time as you and me and once we all know we react to it immediately and the assets re-price accordingly. Houses are not very liquid compared to stocks or bonds, so re-pricing is slower and more volatile (just a mathematical fact) and therefore predictions are worthwhile as prices more from AB after a major change or economic shake up. I’m one to talk though, I’m as dumb and as dumb lucky as anyone else out there and I’ve had my share of good and bad decisions- most of the bad ones made with too much emotion. Rookie mistake.
After all that though, no guts, no glory, and the chance to make a superior return based on what our personal value-add is to a given investment opportunity keeps it all interesting. The thrill of the risk and the reward keeps us engaged, otherwise we’d have to get a life, a second job, and a real hobby.

Thanks Trev.