Stephen Gordon writes one of my favorite blogs on economics, and pointed out something interesting about what’s going to hit the news tomorrow.

The CPI will be negative. This does not mean we’re headed for deflation.

Brace yourself for stupid news articles in advance. As Dr. Gordon explains here:

Tomorrow’s headline inflation number will be calculated as follows: take the June 2009 number, divide by the June 2008 number, subtract 1 and multiply by 100. This number will almost certainly be negative, but it will most emphatically be not a sign that Canada has drifted into deflation.

The reason for this is that in June 2008, there was a runup in gasoline prices. Between May and June 2008, the transportation component of the CPI rose at an annual rate of some 22%, and this brought the annualised monthly inflation rate of headline CPI up to 8.8%. Since then, gasoline prices have fallen, and so has the CPI. So when the June 2009 numbers are published, the headline rate of inflation will be calculated using a base of  114.8. In May 2009, the CPI was at 114.1, so the only way we could avoid seeing a negative year-over-year inflation number is if June comes in at 114.8 or higher – an annualised inflation rate of 7.6%. If that happens, the real risk is of inflation, not deflation.

So tomorrow and Saturday, expect to see dumb headlines such as “Canada slips into deflation” in the MSM. Try to ignore them.

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Here’s just one chart from a great big workbook of historical stats for Alberta. It’s the Consumer Price Index, set to 2002 as the zero year. It’s reported quarterly, with the first day of the quarter reported as the data point (i.e. April 1, 2002 is Q2 2002)

Yes, this only goes up to the end of 2007. More will come later, and this spreadsheet has been in the stack long enough that I’ve forgotten the source. The raw data comes from Stats Can and CMHC though.

Enjoy!

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Bank of Canada faces pressure to make deep cuts in interest rates

The Bank of Canada will step up to the plate to support the slumping economy with a whopping three-quarter-point cut in interest rates before Christmas, analysts with Canadian financial institutions projected.

I’m glad I’m on a variable rate mortgage. I love getting the note in the mail telling me how much more of my payments go to principle, and thus how much more cashflow I can have if I want it.

Canada to speed up immigration

Ottawa announced plans to take in up to 265,000 new permanent residents in 2009 and speed up the processing of applications for potential new Canadians in dozens of high-demand occupations.

I think this is great news, and another reminder that there’s lots of jobs out there. People with jobs make good renters.

No further stimulus in the works, Flaherty says

I agree with him that no action is required right now. That dosen’t play well in the media, but it’s the right thing to do, and a number of economists agree. (Quick aside: Stephen Gordon’s blog is one of the most interesting, intelligent and engaging reads on Canadian Economics out there. Don and Russ, you should think about inviting him to speak.)

“When you contrast [Canada's stimulus] with the United Kingdom and the United States, you will see that both of those countries are trying to catch up with what Canada has already done in terms of stimulus,” Mr. Flaherty said.

The Tories Blink, Move Budget Up a Month

If you haven’t caught this travesty of democracy, get reading. This is ridiculous.

Fight recession through infrastructure: Flaherty

This is one of the best ideas yet, and if the P3 partners can get funding it’ll work just fine. There’s a great video about this topic I’ll try to find.

BMO weathering financial storm well despite $338-million loss on investments

Canadian customers were one of the main sources of growth from BMO, with income from domestic retail operations rising 19 per cent to $344 million.

Rates are coming down!

Which leads to:

Banks’ mortgage rate cuts add to housing affordability

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The market continues to be wobbly all over the place. Through a “erroneous order routed from another exchange” Google’s stock price dropped over 30%. Isn’t that just what the market needs? A confidence booster?

Either way, I sent off the signed paperwork for my mortgage today. I was genuinely concerned that lending would temporarily stop if something happened like the Dow dropping 30% and the exchange closed. 

Worried about the stock market? Your RRSPs?

Buy Alberta real estate instead of stocks or mutual funds. If your RRSPs are in something that’s even semi-liquid I pay double what you’re getting now from your GICs or bonds for RRSP mortgages. In a recessionary or inflationary economy hard assets perform the best, and Western Canada’s going to be at the front of the whole thing.

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Although he doesn’t blog that often, Don Campbell usually write pretty good stuff. One post from the beginning of August was about four hot topics around real estate, and I thought I’d add my thoughts.

#1 Zero-Down Mortgages and 40-Year Amortizations

I mentioned it just this week, that the few banks offering 40-year amortizations were pulling it, and the market is tightening even more. This is due to the current stock market crisis, however it will ease as the crisis fades and real solutions take hold. There’s also a lot of money going into savings accounts and ‘secure’ investments that the banks need to lend out to make money. Don mentioned that very few investors took advantage of these products, so it’s really not an issue. I’ll second that. Any time I’ve applied for a product like this, it’s been for a property that will cash flow with a 25 or 30 year amortization; I’m just trying the other product to free things up a little more. Benjamin Tal mentioned the same thing when he spoke earlier in the summer.

#2 Prices are Down for the first time in 6 years!

The sky is falling! Reality check from Don: No one buys ‘average Canadian real estate’. There are always going to be fluctuations, and that’s why we always plan long term, understand and focus on the unbiased economics. My family’s also been investing in real estate and managing properties since 1972, and we’ve seen the ups and downs. Newbies think that year after year is normal. Anyone can make money in years of 40% growth. I can make money in a flat market. How? Cash flow.

#3 What’s next for Interest Rates?

I just got Peter Kinch’s newsletter, and pointed out that the Bank of Canada doesn’t meet again till October 21st, 2008, after the federal election, and Mr. Carney will have time to review economic numbers and reports. It’s balancing the impact of lowering rates to stimulate the economy and raising rates to stem inflation. Either way, as Don points out:

The good news underlying this situation is that it can only be a gradual increase when they do it, and will provide investors lots of time to lock-in their variable mortgages in the future. -Don R. Campbell

I also heard from my broker this week that a number of variable rate products aren’t avaialbe for the longer amortizations, or higher ratio mortgages. This is a good thing, as it keeps the market stable, although it will slow the rate of investment, and thus of growth in some areas of the market.

#4 There seems to be inflation on the horizon. What does inflation mean to Real Estate Investors?

In a recession, buy hard assets. That means real estate. (Or gold, etc) Why real estate?

• Property values will follow inflation
• Rents increase, even in rent controlled municipalities
• Wages increase more rapidly

I’m not concerned about negative impacts of inflation on my real estate, becuase I’m holding long term. It’s always a bumpy ride though, and we’re definitely in for some bumps.

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