Hang onto your hat!

About 44 years ago (1980), not long after being called to the Bar at Osgoode Hall in Toronto in 1975, I remember thinking how devious it was of bankers to lubricate the sale of money by doubling the capital value of a house then cutting the current lending rate by 50%. You will for example note that from the banker’s perspective the calculation of interest (Principal x Rate x Time) is the same whether the principal (loan) were $100,000 and the rate 10% per annum or whether the principal (loan) were $200,000 and the rate were 5% per annum; namely, $10,000 in either case. The unquestionable difference however is the reflex attitude that getting something for less makes the product more worthy.

While this conspicuous gambit no doubt furnishes endless refreshment (and one presumes a resulting handful of profit) for the interested parties (bankers, realtors and sellers), it does however insinuate the working financial model with two critical assessments; namely, the value of property and the cost of borrowing. Every time there is a hiccup in these manipulations (and, make no mistake, with the help of the federal bank of Canada that is precisely whence derives these so-called economic alterations) the knee-jerk reaction is immediate distress and recalculation, the resulting effect of which is predictably a stagnation or disruption of the market.

The competing economic interests which balance worth and cost (that is, the breadth of capital and depth of interest rates) are obnoxious ingredients which are unrelenting in the advancement of their particular cause and survival.  Curiously this popular economic two-step can, for those not immediately aligned to either capital or money, afford a welcome transition and possible improvement. If for example the investment of money suddenly expands, it is to be expected that interest rates on GICs or other such fundamental security, will increase (“grow” might be presumptuous). It is as always a distinction without a difference. The diminished cost of owning capital is a 2-edged sword. The net worth of one’s portfolio alters perceptibly but not necessarily with estimable advantage or disadvantage. We may end up inhaling Andrew Carnegie’s words to play the market by slow and small gains and losses.

Andrew Carnegie (1835–1919), Scottish-born US industrialist and philanthropist. He built up a fortune in the steel industry in the US, then retired from business in 1901 and devoted his wealth to charitable purposes, in particular libraries, education, and the arts. He established the Carnegie Institute of Technology in 1900.

Andrew Carnegie

This afternoon while pedalling my red Evo Latitude tricycle about the garage for some moderate exercise, I ended chatting with a fellow who resides here in the building with his wife. He told me he previously enjoyed living nearby a lake. Given his relatively youthful age and his ostensible good health, I acknowledged that removing oneself from the activity surrounding lake living presents a challenge for one in an apartment.

Collateral to our discussion the gentleman indicated he has encountered a steep decline in real estate activity; specifically he has not yet sold his former residence. He speculated the market is reacting unfavourably to the projected interest rate hikes. Meanwhile he said property values have already started to drop.  The market has reputedly changed overnight; and purchasers have seemingly evaporated at least temporarily.

I am of the opinion that when providing an economic forecast a good deal depends upon the domestic real estate market.  It captures not only the general buoyancy of the market (that is, the mere interest in promoting reciprocal bartering and enhancing the movement of capital from one to the other); but also encourages (or depletes, depending on the direction) the overall urgency if any surrounding the upward or downward movement of activity.

Somewhere no doubt in the mix of these prophesies and projections are the words of my late father.  He delighted in recounting an adage, “Money doesn’t disappear, it just changes hands!” To what particular economic model he may have directed this wisdom I do not know though its axiomatic purity is difficult to object to. Whether as a result the adage contains a broadening knowledge is something to ponder in the meantime. For my part I shall continue to defer to the direction of our financial advisor. I watch the market with the same gusto with which I regard the distant meadow along the river, the inevitable distortions of nature and time.