Briefing highlights
- It's going to be damned hard doubling your money
- Peso gets a debate-related bounce
Doubling your money
Where interest rates are concerned, things aren’t going to be “normal” for some time yet. But when we do get there, it’s going to be damned hard to double your money.
In fact, warns Toronto-Dominion Bank economist Brian DePratto, it’s going to take about eight years longer.
It has to do with “neutral,” or “equilibrium,” interest rates, effectively the rates one would deem normal when the economy is at “cruising speed,” as Mr. DePratto put it.
God knows, we’re a long way from that speed in Canada, and well below an equilibrium rate.
But we’re going to get there at some point. And when we do, that rate will be lower than during the pre-crisis days.
The Bank of Canada’s benchmark overnight rate now stands at 0.5 per cent, where it’s likely to stay for a couple of more years.
What’s important going forward is that central bank staffers now peg the equilibrium rate at 2.75 to 3.75 per cent. That’s down from the pre-crisis range of 4.5 to 5.5 per cent, as Bank of Canada Governor Stephen Poloz noted in a speech last week.
This will affect those in the fixed-income world, be they retirees or retail and institutional investors. Mr. DePratto used a 10-year government bond as an investment example. The yield would be lower, though the “challenge would be universal,” he said.
“For an investor, that means it will take nearly eight years longer to double their money at the equilibrium interest rate,” Mr. DePratto said, or a jump to about 22 years from 14 years, calculations based on the central bank’s overnight rate.
It’s also based on what’s known as the “Rule of 72,” used in calculating the time it takes to double our money on an investment at a certain annual rate of return. You divide the annual rate into 72 to get the approximate time.
“While the exact lengths would change for someone longer out on the [yield] curve or in different markets, I think it still speaks to the need to re-evaluate investment decisions and horizons, as Governor Poloz pointed out in his speech,” Mr. DePratto said.
Indeed, when he spoke last week, Mr. Poloz lamented the impact on those of us who save, particularly the older ones planning on retirement or already there.
“I have heard from many Canadians who are rightly worried about their ability to live off their savings and who are seeking a return to higher interest rates,” Mr. Poloz said.
But what’s driving this is the “steady decline in the potential growth rate of the economy,” according to the Bank of Canada chief, as the population ages and the work force grows at a slower pace.
Mr. Poloz can’t fix this by driving interest rates back to pre-crisis levels because of the damage that would do to the economy.
There are some silver linings, of course, such as the rise in asset values, though Mr. Poloz noted this may be “cold comfort” to those who have to overhaul their plans.
A last point here: We’re living longer, which means further adjustment.
“I hope you will agree that this is unambiguously good news,” Mr. Poloz said. (I do. I do.)
“But combining longer life expectancy with low interest rates means that a person starting to save today would have to set aside much more to generate the same retirement income as a person who began saving 25 years ago, if both wished to retire at the same age.”
So who won?
The currency markets appear to believe that Hillary Clinton won Monday night’s fierce debate.
Mexico’s peso rallied, as did Korea’s won, and even the Canadian dollar got a short-lived boost after Ms. Clinton faced Republican rival Donald Trump.
The loonie climbed from a low of about 75.3 cents U.S. just before the debate to as high as almost 76 cents in the morning hours, though it then came back down to just about the levels of Monday evening.
The peso is the “closest [foreign exchange] proxy for Trump’s election prospects,” said Royal Bank of Canada senior currency strategist Elsa Lignos.
“The press verdict on the first U.S. presidential debate is that Hillary Clinton ‘won,’ but Donald Trump didn’t lose badly enough to really reduce the uncertainty,” said Kit Juckes, the chief of foreign exchange at Société Générale.
“The market verdict is that the Mexican peso, the South African rand and the Korean won all won, while the Japanese yen was the lower (but it lost less than they won),” he added.
“In other words, Mexico heaved a sigh of relief (for now, at any rate) while the markets have gone back to what they know best - hunting for yield.”