As I write this newsletter on a Sunday evening, I must apologize in advance. By the time you read this, it may already be stale. The pace of the news flow right now is truly unprecedented.

While everyone was out enjoying their Sunday afternoon stroll in the park, the Federal Reserve was frantically plugging away, desperately trying to stem a severe liquidity crunch. The Fed slashed its benchmark interest rate by a full percentage point, officially hitting the zero bound. They’ve also promised to boost its bond holdings by at least $700 billion. Not sure if we’re officially calling this QE4 or QE5, to be honest, i’ve lost count. We are on the path to full debt monetization, probably much sooner than anyone would have imagined.

Short of throwing the kitchen sink, i’m not sure what else central bankers can do. If this doesn’t work, expect a full market shutdown.

In other news, Canadian policy makers are busy making moves of their own. Not only did the Bank of Canada cut interest rates by 50bps, with at least another 50bps expected this week, we had OSFI, the Canadian Bank regulator, unleash an additional $300B in lending capacity. OSFI lowered the domestic stability buffer requirement for Canada’s key banks to 1% of risk-weighted assets from the 2.25% level set for the end of April. In simpler terms, this is a move to encourage banks to continue lending. However, given the outlook, they’ll probably need some more nudging to keep the mortgage wheel churning. Already, we are seeing both fixed and variable rate mortgage rates moving higher, despite interest rates falling. Call it funding issues, call it a risk premium, either way it’s concerning news.

Meanwhile, OSFI also announced the amendments to the mortgage stress test have been put on hold. In other words, the stress test is staying as is, there are much more urgent problems to be dealt with. Given the recent events, we should probably be thankful there is a stress test in place.

Job layoffs are en route, and unfortunately no amount of stimulus will be able to prevent that. That puts Canadian households in a tough position. CMHC is already working with lenders, announcing tentative plans to work with lenders to allow mortgage payment deferral of up to 6 months. This will be for insured mortgages only. CMHC president Evan Siddall mentioned to me that they are “exploring what is possible for uninsured homeowners and renters.”

Obviously, there is no precedent for this. Policy makers are flying blind. Indeed, there will be bailouts, but not for everyone.

Stay nimble, stay safe.

Three Things I’m Watching:

1. “Churches, Schools, Shows Closed” This is what the front page of the Seattle Daily Times read on Oct 5th, 1918 during the Spanish Flu.

2. Open table reservation data shows seated diner volumes down 40% in Canada.

3. Fed Balance sheet is rapidly expanding, set to surge to new heights as they pump reserves into the system.


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