GIC Rates Big Jump Up To The Top | Page 3 | Tangerine Bank | Discussion forum

Alexandre said

Doug said

...I'm now shifting my recommendation from 1-3 year GIC maturities to fully 5 year maturities ...

I will be tactically shifting my large cash position into secure equities later this year when my Coast GIC matures and next year when my Concentra GIC matures. I'll probably take my cash position down to as little as $25,000.

Doug,

What we see these days is Canadian government printing money and spending it like there is no tomorrow (perhaps, they know something we don't).
Are you not concerned that this "free money" could cause inflation and hyperinflation down the road?

Maybe not this year, but what if two-three years from now the average annual deposit interest is 10% and mortgage is 20%? Buying into 3% interest rate GIC sounds great today, but I don't have guts to lock my money in 5 years term.

Would love to hear your reasoning why does 5 year GIC make sense. Serious question.

Thanks.  

Hi Alexandre,

Do you prefer Alexandre or is Alex okay?

I'm not concerned about hyperinflation because of our aging demographic, low birth rates, late blooming household formation rates, and low commodity prices, all of which contribute to low economic growth. Money printing will be inflationary, but so long as it is managed tightly and curtailed quickly, we should be okay. For example, if the Bank of Canada expanded the money supply to eventually buy up all Government of Canada debt and either (a) write it off or (b) have it be repayable in installments over, say, 20-25 years, the amount the government normally paid towards interest would be going entirely towards the principal. However, we can't just do this and maintain our government staffing levels and extraneous program spending, we've got to get spending down within our revenues. But, at the same time, if we do that, the government can then borrow through the capital markets at market, albeit still low, rates, on a massive infrastructure renewal and new infrastructure program (we didn't need the Canada Infrastructure Bank to do this; that was an exercise in bureaucracy bloat—suspect I'll get no argument from Bill here), which will provide stimulus. With a new cross-country rapid transit network and more people working remotely permanently because of the forced remote work from COVID-19, young families will be able to work for a Vancouver or Toronto firm and live in Medicine Hat, Thorold, or Fort St. John. In short, limited housing supply in urban markets will no longer be a barrier to home ownership as people will be able to live where they want.

If it's not managed correctly, which is possible, then yes, hyperinflation would still be theoretically possible; however, it's still less likely than in the past, I think.

So, I think with low rates expected to be this low, or nearly this low, for the next 5-10 years, I would recommend locking in for the longer term. When I previously recommended shorter terms, that was because I thought rates would still rise modestly. We're back to 0-0.25% now. If I thought hyperinflation was more realistic, I would not be recommending GICs or bonds of any duration. I would be recommending a mix of gold bullion and probably some shares of gold miners.

Cheers,
Doug

Norman1 said

happyavocado said
I am aware that Tang and Simplii are not in the same situation. I paired them because, let's be practical here, it's not as if Scotiabank would sit on the sidelines and let Tang vaporize. The reputation damage would be fatal -- it's not even conceivable that they would let that happen.
…

There would be no reputation damage from walking away from an obligation one doesn't have legally have.

Many years ago BCE did just that. They walked away from BCE Development. Those who attended the BCE annual meeting next year received a lesson in how corporations work.

In response to some BCE shareholders who were also BCE Development shareholders, the CEO explained that BCE Development is a separate company and that BCE does not routinely guarantee obligations of the companies it owns. He acknowledged that BCE could have put more money into BCE Development. But, they did the analysis and found that BCE would be just throwing good money after bad.

BCE would end up losing less if they just wrote off their investment in BCE Development so far and let the remains of BCE Development fall into the hands of the creditors through bankruptcy. That's what BCE ended up doing.

BCE's reputation didn't suffer. What did suffer were the reputations of the dim-witted brokers who told their clients, like myself, that BCE would stand behind and not let BCE Development fail.

That sounds uncannily like what people are writing here now about Scotiabank not letting Tangerine Bank go down, doesn't it?  

Simplii may not be the same name as CIBC, but their transits are under the CIBC name. So yes there will be reputation risk, same for Tangerine even tho Tangerine is under its own CDIC. Simplii is not (or was not last time I checked).

Dont think the BCE development comparison is similar, when it comes to a bank. But good story as I did not even know that one.

@Norman1, that may well be, I'm not certain. I will concede that I have to look into this further. You are probably right with respect to BCE, but I will have to look into the bank examples as they are incorporated under the Bank Act, not the Canada Business Corporations Act and related provincial corporate laws.

However, in the Scotia/Tangerine examples, one needs to consider the likelihood of failure, too. Tangerine has way more deposits than their loans and mortgages (something like $5 billion in residential mortgages and $39 billion in deposits). They fund other things, too, but the credit card balances do not exceed $1 billion. No bank, as far as I'm aware, has failed or been written off by a parent company bank because of their deposits (specifically, deposits going missing).

Although I prefer the Simplii Financial branch transit of CIBC arrangement, I loathe the lack of transparency as CIBC doesn't break out Simplii Financial as a separate division or business unit. Being part of CIBC, there are no OSFI financial returns to review, either. I suspect they have way more loans and mortgages than Tangerine and are probably more profitable than Tangerine, but again, CIBC doesn't have to, and refuses to, provide financial statistics on Simplii Financial. Yes, they're part of CIBC so CIBC would have to "fail," but if you are correct that a parent company can write off a subsidiary, then that works in reverse as well.

Cheers,
Doug

Bud said
bce develop is not same as scotia/tang. there would be significant damage to the banks reputation if they let fail and would bring the big 5 down to a lower level. sorry normy
…

You are the one who does not understand. Tangerine Bank is not one of the Big 5 Banks. It is only people who don't understand who believe that.

You are just like those confused shareholders at that BCE annual meeting who didn't understand that BCE Development and BCE were two separate companies and were asking why their BCE Development shares were now worthless when the parent company BCE was reporting such a good year.

Norman1 said
You are very naive if you think a company won't walk away from a $5 billion mess if its not legally obligated to it.
  

Please clarify - what $5 billion mess are u talking about? Tangerine? (or the BCE situation?) Tangerine does not seem to have any $5 billion "mess"? As well, I believe OSFI will be closely monitoring the banks as we go forward.

canadian.100 said

Please clarify - what $5 billion mess are u talking about? Tangerine? (or the BCE situation?) Tangerine does not seem to have any $5 billion "mess"? As well, I believe OSFI will be closely monitoring the banks as we go forward.

Sorry, didn't mean to alarm you!

The discussion is hypothetical at the moment. There's no $5 billion mess at Tangerine Bank right now!

What I believe is that should Tangerine Bank be ever $500,000 short, for some unexpected reason, I'm sure ScotiaBank would just inject the needed $500,000.

However, should the unexpected situation instead need something more substantial, like $5 billion, ScotiaBank could find it not worth the $5 billion and let Tangerine Bank fail. ScotiaBank shareholders would definitely support that, not taking a $5 billion hit when it didn't need to.

It will depend on what the situation would cost to fix.

Doug said

However, in the Scotia/Tangerine examples, one needs to consider the likelihood of failure, too. Tangerine has way more deposits than their loans and mortgages (something like $5 billion in residential mortgages and $39 billion in deposits). They fund other things, too, but the credit card balances do not exceed $1 billion. No bank, as far as I'm aware, has failed or been written off by a parent company bank because of their deposits (specifically, deposits going missing).
…

The parent bank will usually share operational expertise with the subsidiary bank. So, a situation where the parent would even need to consider writing off a subsidiary bank is not likely to come up. It would have to be something unexpected.

I don't think it is likely at the moment. But, the estimated risk with Tangerine Bank is not easy to quantify. Its debt ratings were discontinued when it was sold to ScotiaBank.

Uninsured Tangerine Bank deposits are like a Tangerine Bank bond. Without a DBRS debt rating, such deposits are then an unrated bond.

3% would quite good if such bonds were rated AA. But, not if such bonds were just BBB. That's because some BBB-rated bonds are now yielding more than a 4%.