Juggling Dynamite

Markets are celebrating that the United States and Iran agreed to a two-week ceasefire amid ongoing negotiations.  So far, the parties seem worlds apart, especially on issues like Iran continuing its nuclear program. But we all hope for a sane and rapid end to the carnage. Fossil fuel prices are down sharply, and stocks are giddy. More importantly, government bond prices are rising.

Falling fossil fuel prices reduce inflation fears. So do falling home prices and rents. Shelter accounts for 30% of Canada’s CPI basket and 36% of the US CPI — by far the largest single inflation driver in both countries.

Last month, home sales in the Greater Toronto Area (GTA) rose 1.4% over February but were still 52% below the 10-year average for March. See, Toronto home sales post first monthly increase since September.

Every type of property has lost value in Toronto and its surrounding suburbs, but prices remain debilitating for most. Last month, the GTA home price index was $928,000 — 7% lower than in March of 2025 and still an impossible 9 to 10x the median household income (around 100k before tax).

The real estate industry loves to cite economic uncertainty as a deterrent to prospective buyers, with little mention of unaffordable pricing. Significantly more mean reversion is needed before purchasing power returns to buyers.

Struggling consumers are a major reason the bond market’s best guess of inflation over the next five years has remained flat, even since the war began. Higher prices reduce spending power, and in the long term, that’s less inflationary. This morning, Futures markets are back to pricing in an easing Fed by year-end. For some historical context, see Pain at the Pump Should Mean Pain in the Economy, Not Higher Rates:

In the annals of central-bank mistakes, three loom large: 1973, 2008 and 2011.

In the oil shock of 1973-74 caused by the Arab oil embargo, the Federal Reserve is generally regarded as having ignored the second-round effects of oil prices and kept monetary policy too easy.

But the mistake was made not when oil prices rose, but when they fell back during the deep recession caused by the oil-price spike. As recession took hold, the Fed eased policy, then kept it easy even when core inflation refused to drop below 6%.

It’s hard for those who weren’t there to believe now, but in 2008 and 2011 the ECB raised rates, focusing on soaring crude prices and ignoring already obvious trouble in the financial sector. In 2008, it had to reverse course rapidly as banks imploded, and again in 2011 as the entire euro system threatened to implode.

In each case, the problem of high oil prices quickly turned into a problem of a weak economy, with lower oil prices and falling inflation. As the saying goes in commodities markets, the cure for high prices is high prices. These hurt demand and, eventually, stimulate investment in new supply.

Second, high oil prices also hit the economy. Consumers and businesses face higher and hard-to-avoid costs, much like a new tax. There should be no need for a double whammy for borrowers in the form of higher interest rates.

It’s hard for inflation to find purchase amid a deteriorating labour market. Canada’s economy has lost 100k jobs in the past two months, and Moody’s Chief Economist Mark Zandi points out that the indicator that has called every recession since WWII just signalled the US is already in one.

Danielle Di-Martino Booth connected many of these dots well this morning on Bloomberg.

For more than two decades, I have been warning individuals about the heightened risk and stress associated with high debt levels and financial bubbles. Unfortunately, many older people are financially uninformed and don’t set a good example for younger people. Worse, many parents and grandparents have encouraged and enabled young people to become heavily indebted. They thought they were helping, but in many cases, their advice was harmful. We are now paying the price for that with interest.

The Bloomberg Nanos Canadian Consumer Confidence Index fell to 46.93 in the week ended April 3, while the expectations index extended its four-week loss to almost 10 points. A reading below 50 indicates net negative views. It was the lowest reading for both indexes since May 2025, when consumers and businesses were still digesting the initial shock of US President Donald Trump’s “Liberation Day” tariffs.

Just 15% of Canadians see a stronger economy six months from now, compared with 27% four weeks ago. See, Canadian Consumer Confidence Hits 11-Month Low as Iran War Drags On.

Food bank usage increased 90% between 2019 and 2024, according to Food Banks Canada. Other social transfers in kind, where Statistics Canada records food bank usage, are up nearly 40% for Canada’s lowest income households over the same period, compared to 28% across all households (RBC report).

Beyond a sluggish economy, rising unemployment, and angst with our largest trading partner, Canadians are the most indebted households of developed economies. Household debt totals $3.1 trillion, equivalent to 100.8% of GDP (Q4 2025).

The US comparison tells the real story. Both countries had similar household debt levels in the early 2000s, but their paths diverged sharply after the 2008 financial crisis. American households went through a sustained deleveraging — paying down debt and rebuilding balance sheets — while Canadian households kept borrowing, largely fuelled by rising home prices and cheap mortgages. Canada’s ratio surpassed the US’s around 2011 and has continued to outpace it since, with Canadian households reaching a peak debt-to-income ratio of 188% in Q3 2022 — higher than the US ever reached, even at the peak of its 2007 housing bubble. (Statistics Canada)

The recent modest decline from that 188% peak reflects the impact of higher interest rates cooling mortgage borrowing, but the debt-to-income ratio rose again to 177.2% in Q4 2025, marking a fifth consecutive quarterly increase as debt growth continued to outpace income.

Record debt levels led Canada into a world-famous housing bubble that is now in its 4th year of deflating, eroding notional equity from household balance sheets while debt levels persist. Deflating stock prices are another depressant of net worth. It will take time, more price deflation and debt retirement to dig our way back to economic health and resiliency. The upside is that we can learn from the experience.

Honest, unvarnished by salespersonship, advocates for financial literacy are rare, but they do exist, and it is never too late to admit past mistakes, repent, and reform behaviours to recover. Everyone who takes the time to learn and understand can help. The discussion below is worth sharing.

Our guest this episode is Doug Hoyes — Co-Founder of Hoyes Michalos (‪@DebtFreein30‬) Licensed Insolvency Trustee and one of Canada’s leading experts on debt and personal insolvency. Doug has spent decades helping Canadians navigate financial hardship and is a passionate advocate for ensuring people understand their options and find the right path forward. In this episode, Dave and Doug dive into the world of debt, bankruptcy and consumer proposals — what they are, how they work and when each option might make sense. They break down how Licensed Insolvency Trustees operate, how consumer proposals are negotiated and what actually happens if you file for bankruptcy (what you keep, what you lose and who typically ends up choosing each path). Doug also shares insights into why so many Canadians are struggling with debt today, from inflation and the “K-shaped” economy to mortgage renewals, rising vehicle costs and the financial impact of divorce.  Here is a direct video link.

 

For more than a decade, the hottest asset class on Wall Street was private credit and private equity funds, where assets held by the funds rarely changed hands and ‘estimated’ values were steadily marked higher by the managers.