🇨🇦’s financial system may be just weeks away from a crisis.
It’s probably more lucrative to not explain this to you normies, but f*ck it—no one’s going to change the trajectory.
Let’s talk about 🇨🇦’s upcoming credit crunch. But first, a primer on credit.
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It’s probably more lucrative to not explain this to you normies, but f*ck it—no one’s going to change the trajectory.
Let’s talk about 🇨🇦’s upcoming credit crunch. But first, a primer on credit.
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2/ some people assume the central bank just picks an interest rate. Nope, credit is based on supply & demand.
When supply exceeds demand, costs falls. If everyone wants to lend you money, you don’t pay a lot. That’s why Zuck’s mortgage is only 1%.
The opposite is also true.
When supply exceeds demand, costs falls. If everyone wants to lend you money, you don’t pay a lot. That’s why Zuck’s mortgage is only 1%.
The opposite is also true.
3/ if you need more money than the market wants to lend you, the cost rises higher. Think of payday loans.
When the Global Financial Crisis hit, everyone wanted to lend stable democracies money. This led to the era of low rates—cheap loans for all!
When the Global Financial Crisis hit, everyone wanted to lend stable democracies money. This led to the era of low rates—cheap loans for all!
4/ the reason this was attractive was due to decay control, aka inflation.
The bonds investors bought were issued in more stable currencies, which managed inflation well. 🇺🇸 is the global reserve, & usually the biggest winner.
But 🇨🇦 also has a very stable banking monopoly.
The bonds investors bought were issued in more stable currencies, which managed inflation well. 🇺🇸 is the global reserve, & usually the biggest winner.
But 🇨🇦 also has a very stable banking monopoly.
5/ cheap loans for all! In 🇨🇦, there’s two main types of bonds that attract investors—Gov & mortgage bonds, guaranteed by the gov but they pay a higher yield.
Now let’s circle back to inflation. That *is* something the central bank tries to control.
Now let’s circle back to inflation. That *is* something the central bank tries to control.
6/ it’s another supply & demand sitch.
Too weak? Central bank cuts rates to stimulate demand faster than supply chains, and create inflation.
Too high? Rates rise to slow consumption, slowing inflation.
Got it? Hopefully you do, because here’s where shit goes sideways.
Too weak? Central bank cuts rates to stimulate demand faster than supply chains, and create inflation.
Too high? Rates rise to slow consumption, slowing inflation.
Got it? Hopefully you do, because here’s where shit goes sideways.
7/ so in Feb 2020, inflation was a healthy 2.2%, 0.2 ppt above target.
It drops to 0.9% in Mar based on declines in crude, travel, restaurants, & car rentals. Cheap credit doesn’t stimulate consumption of physically restricted products, so it inflates other areas.
It drops to 0.9% in Mar based on declines in crude, travel, restaurants, & car rentals. Cheap credit doesn’t stimulate consumption of physically restricted products, so it inflates other areas.
https://twitter.com/stephenpunwasi/status/1769703111570882933
8/ 🇨🇦 went on an borrowing spree, not just for emerg related issues but full on helicopter money w/no scrutiny.
If inflation doesn’t rise to target, the central bank will engage in quantitive ease—QE. It expands its balance sheet to create excess credit to boost inflation.
If inflation doesn’t rise to target, the central bank will engage in quantitive ease—QE. It expands its balance sheet to create excess credit to boost inflation.
9/ Except inflation was 3.4% by April 2021, over 50% above target in a year.
Remember transitory inflation? It wasn’t in transitory segments.
A year later, I was invited to parliament to testify & explained the BoC was still buying bonds to absorb gov borrowing.
Remember transitory inflation? It wasn’t in transitory segments.
A year later, I was invited to parliament to testify & explained the BoC was still buying bonds to absorb gov borrowing.
https://twitter.com/stephenpunwasi/status/1570245625891160064
10/ For good measure, I found out the BoC studied what to do if the gov is borrowing so much that they can’t conduct proper monetary policy.
The gov was borrowing because it was cheap. The central bank was making it cheap because the gov kept borrowing.
A circle jerk of idiots.
The gov was borrowing because it was cheap. The central bank was making it cheap because the gov kept borrowing.
A circle jerk of idiots.
11/ the week before, Tiff testified it was foreign countries. The week after, he said it was them.
That was thankless, I should have just bet against the currency & watched it collapse. Maybe next time.
Anyway, fast forward to Freeland’s pressure to politicize SWIFT.
That was thankless, I should have just bet against the currency & watched it collapse. Maybe next time.
Anyway, fast forward to Freeland’s pressure to politicize SWIFT.
12/ remember in 2008 how the 🌎 piled into Western bonds?
🇨🇳 took the opportunity to explain to countries why they need to diversify, since they can be shut out of the global financial system for non-NATO conflicts.
It’s hard to shed 🇺🇸’s $, but 🇨🇦? Not so much. A lot to this.
🇨🇳 took the opportunity to explain to countries why they need to diversify, since they can be shut out of the global financial system for non-NATO conflicts.
It’s hard to shed 🇺🇸’s $, but 🇨🇦? Not so much. A lot to this.
https://twitter.com/stephenpunwasi/status/1499849976972779525
13/ Remember those mortgage bonds? Well, the gov never tried to solve its housing bubble. It was generating reasons to give developer friends subsidized loans.
After they inflated home prices, they piled in easy immigration. Record prices occurred at record low immigration.
After they inflated home prices, they piled in easy immigration. Record prices occurred at record low immigration.
14/ immigration ramped up a year later to create a cover, & generate more state-subsidized loans/handouts.
They would crowd the market further, explain they need to build more for lower prices. Behind your back they explained higher prices are needed to build more. Whoops.
They would crowd the market further, explain they need to build more for lower prices. Behind your back they explained higher prices are needed to build more. Whoops.
https://twitter.com/BetterDwelling/status/1814385781823418401
15/ now here’s the problem. There’s record low demand for CAD denominated bonds.
Mortgage bonds fund this two-bit scheme. Good thing the million IQ gov had this idea—the gov will borrow to buy the mortgage bonds itself.
Even the CMHC warned against this.
Mortgage bonds fund this two-bit scheme. Good thing the million IQ gov had this idea—the gov will borrow to buy the mortgage bonds itself.
Even the CMHC warned against this.
https://twitter.com/betterdwelling/status/1782873159508586563
16/ not just because the gov is issuing, guaranteeing, & buying its own debt.
Mortgage bonds have higher yields, so it attracts different investors.
The gov assumed it could pocket the difference. It just lost that capital, lowering demand further.
Mortgage bonds have higher yields, so it attracts different investors.
The gov assumed it could pocket the difference. It just lost that capital, lowering demand further.
17/ Now this is where it gets comically bad. Let’s circle back to the bonds the BoC bought that I warned about.
QE is balance sheet expansion. To prepare for the next recession, it needs to engage in QT—quantitative tightening. This is the process of removing liquidity.
QE is balance sheet expansion. To prepare for the next recession, it needs to engage in QT—quantitative tightening. This is the process of removing liquidity.
18/ the BoC lost $6B last year dumping these. Borrowing on behalf of others has a cost, either higher rates or monetary weakness.
They know you don’t understand it, & that’s what they love about you most.
But now no one wants bonds, so now the BoC has a problem.
They know you don’t understand it, & that’s what they love about you most.
But now no one wants bonds, so now the BoC has a problem.
19/ since all credit competes, this distorts short term markets.
At least one bank is complaining how unloading QT is crowding the market, causing higher short term borrowing costs.
It’s unlikely the BoC will deleverage before the next recession, so the recovery won’t be easy.
At least one bank is complaining how unloading QT is crowding the market, causing higher short term borrowing costs.
It’s unlikely the BoC will deleverage before the next recession, so the recovery won’t be easy.
20/ the liquidity issue is becoming even more apparent.
The BoC dropped a notice they’ll increase short term facilities by 200%… on a Friday afternoon, effective before market on Monday.
Increases in short term liquidity are normal. Emergency increases in liquidity are not.
The BoC dropped a notice they’ll increase short term facilities by 200%… on a Friday afternoon, effective before market on Monday.
Increases in short term liquidity are normal. Emergency increases in liquidity are not.
https://twitter.com/stephenpunwasi/status/1816203373089054784
21/ this isn’t to say 🇨🇦’s banks will fail & you’ll wear barrels w/ straps on the street.
🇨🇦 has G-SIBs, so the world will grind you up to sell as soylent green to create liquidity before a bank fails.
But virtually no one understands how much stress is about to hit the system.
🇨🇦 has G-SIBs, so the world will grind you up to sell as soylent green to create liquidity before a bank fails.
But virtually no one understands how much stress is about to hit the system.
ps before the, “but inflation is so low” crowd wakes up.
If prices rise in the woods and no one is around to hear it, do you still lose purchasing power when you try to buy stuff there?
If prices rise in the woods and no one is around to hear it, do you still lose purchasing power when you try to buy stuff there?
https://twitter.com/stephenpunwasi/status/1615394065771528194
pps remember when I said it doesn’t matter if I explain these issues, no one is going to change the current trajectory?
It’s because #PredatoryLoansMatter (aka partisan hacks) will pretend that criticism of predatory policy is being negative. I’m sure it makes me a racist too.
It’s because #PredatoryLoansMatter (aka partisan hacks) will pretend that criticism of predatory policy is being negative. I’m sure it makes me a racist too.
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