Divestor

Something that always is a pet peeve is currency exchange fees.

As I type this, Interactive Brokers can give you currency spreads that are enormously small:

If you want to buy USD$100,000 it would cost you CAD$108,760. If you wanted to sell USD$100,000 you would receive CAD$108,755. The spread is next to nothing.

We compare this to a typical credit union that posts the following rates:

Although I am reasonably sure the bank would give you a “discount” rate if you dealt with higher currency volumes, at their posted rates that USD$100,000 would cost you CAD$111,550 or about $2,790 difference from Interactive Brokers.

It is a simple procedure to get the cash out from the bank once you beam it from IB. Due to the miracles of margin accounts, you don’t even have to explicitly convert the currency – you just withdraw the amount and deal with the debit balance later (if you do not already have the US cash on hand).

When dealing with small amounts (e.g. less than $100) it is generally immaterial to pay the $3 or so compared to going through the optimal route, but when dealing with larger quantities of money, exchange fees add up considerably.

Most credit cards will do an exchange at the legitimate market rate, but tack on a 2.5% or 2.9% currency exchange fee. There is only one company that I know of in Canada that does not charge such a fee, and that is at Chase Canada. Unfortunately their cards in question are lacking in any other features that would make this useful for anything other than foreign credit card purchases. However, if you know you are going to spend a significant amount of money outside of Canada using your credit card, then these cards in themselves would constitute an implicit “reward” of the 2.5% or 2.9% currency conversion fee that you would otherwise be charged.

There’s more media sensation over the Investor’s Group offering a 3-year prime-minus 1.01% variable rate mortgage (which gives a snazzy 1.99% headline).

The rest of their rates are fairly mediocre, so this is clearly pure marketing instead of them trying to invade the mortgage market. The three-year government bond yield is 1.17% and they will pocket the (albeit) smaller spread. After three years, they’ll try to convert those mortgages into a high-cost fixed rate mortgage or some other product.

But it leads to the question of – let’s say you had access to capital for three years at 2% (assuming those short term rates don’t rise!). The number of safe investment harbours to earn a larger spread is definitely diminished.

So where do typical retail people put low-cost capital? The answer seems to be pretty clear – housing. For that matter, institutions are pouring it into almost everything other than cash – anything with a yield, including equities and bonds, have been bidded up substantially. Financial assets are quite expensive.

Another source of cheap credit is Interactive Brokers, assuming you can post the appropriate equity security to back the margin loan. Canadian dollars right now are 2.5% for up to $100,000, 2.0% for up to a million, and 1.5% after that.

The one thing about accumulating debt is that you’ve got to pay it back. Leveraging when the stock market is at all-time highs and yield spreads between AAA debt and junk bonds are at a minimum is not the world’s best formula to get rich.

As you might tell by the tone of this post, the pickings are slim out there. Almost anything worth speculating on (i.e. with cheap prices) has considerable baggage.