Tuesday, January 17, 2012

Putting a couple of myths to rest..

There are some active myths that the self-serving financial world perpetrates that need dealing with.

Myth number ONE.

It is different here because we have recourse mortgages. ie people cannot walk away and mail in the keys like many states in the US. The debt will follow you unto bankruptcy. True, but does it really matter when you cannot pay?!

If you have very little equity in your home and the RE market falls (ie you cannot borrow more against the value) and you lose an income stream, or get less over-time or have another calamity- you are toast. If rates start rising you are burnt toast. But even without higher rates- if you let the bank mortgage officer cram you into a gigantic mortgage you had better hope that you have a perfect career ahead of you.

Myth number TWO.

The Bank of Canada cannot increase rates even a tiny bit, because the Canadian dollar will explode higher.

Garbage! The CAD is paying 1% and the US rates are at 0.25%, yet the CAD peaked at 1.06 and is now down to 98 cents with neither changing rates.

Furthermore look at the Aussy Dollar. The prime rate in Australia is 4.25% So we should expect the AUD to be 10% higher? 20% higher? It is in fact just over 5% higher than the CAD.

So raising rates by 0.5 or even God forbid 1% would have very little effect on the CAD rate. Exchange rates depend on more than just a tiny differential in interest rates. In our case it depends on the price of oil, Borrowing forecasts etc etc.

Need more proof of the error of this thinking?

The Bank of Japan cut the Yen's prime rate to UNDER 0.1%.... that's right under 0.1%. A farce really- it means that you would have to leave your money in the bank for nearly 9 centuries to double it.

So the Japanese Yen must be trash..eh?

This is what the YEN is doing v the USD. With every cut it has gone higher. So it is not as simple as the simpletons say!