Juggling Dynamite

Advised and led by their US trained finance types, China has followed the same hide-your-debts-playbook that brought down Enron, Worldcom and global financial markets in 2001-03, as well as Bear Stearns, Lehman and global markets again in 2007-09. The difference this time is the unprecedented scope and scale: China is a whole country, the world’s largest population and the second largest economy. The main benefactor of credit-fueled cash flows from the west over the past 15 years, China forgot that credit expansion is a finite cycle and spent like a drunken sailor throughout. Now it’s left holding a leverage on leverage bomb of unprecedented proportions, with sketchy debts oozing out of every crack and crevice.

We should expect that the liquidity and solvency problems there will be felt though highly connected world markets.  This is a necessary part of the great cleanse and reset so needed to reboot asset prices and the economy.  So, long-run positive, but short to medium term dangerous for capital.

Kyle Bass, Hayman Capital Management’s chief investment officer and managing partner, discusses China’s economy and the global risks to financial markets.  Here is a direct video link.

A footnote here:  Mark Mobius has run long-always Emerging Market mutual funds for Templeton Funds for years, he is always buying and always bullish, no matter what returns and risks are likely to be.

A caveat I would add on the health care and insurance costs discussion in this clip, it’s not just that corporations have gained too much control, but also that we individuals have abdicated too much personal responsibility for our own life and health choices.

The progressive leader takes aim at Wall Street spending and explains how a billionaire real estate mogul won over the working class.  Here is a direct video link.

It’s official, as of the 2016 census released today, Canada now has more citizens over the age of 65 than under the age of 15. See: Canadian seniors now outnumber children for the first time. Here is the chart, showing the cross over last year, and the projected spread set to widen over the next 45 years.

At current birth, death and immigration numbers, a full 23% of the Canadian population is projected to be seniors in just 14 years, on par with Japan today–the world’s ‘oldest’ population where retirees are no longer net savers, but already net-sellers of financial assets and real estate in order to raise cash for living expenses.  Near zero investment yields are accelerating the need for retirees to consume savings in Japan and most of the world.

As in most wealthy countries, the average number of live births for Canadian women at 1.59, is less than the 2.1 needed to maintain, let alone grow the population.  Only more immigration can soften the rate of decline in our working age to total population ratio, and immigration has become increasingly unpopular with the masses.

The trends do not bode well for consumption demand, nor the many income, benefit programs and subsidies, that are dependent on worker contributions and taxes.

Less income, less wants and less spending, are all part and parcel of a population naturally inclined to downsizing, lowering expenses, and moving to elder-friendly residences.

The defining question for the real estate frenzy that’s driven an estimated 84% (Scotiabank) of Canada’s economic growth over the last 6 years then, is who will buy our present concentration of single-detached homes (53.6%, see bel0w) full of old-tech energy and efficiency systems, presently trading far, far, above reasonable affordability and income multiples, amid escalating taxes of every kind?

What about foreigners looking to park money in Canadian assets, can’t they ‘buy it all’ and save the day? Doubtful for many reasons, but lest we forget:  the ones with the buying power are also predominantly of the same aging demographic. They can’t be voracious forever.  In all these circumstances, it’s hard not to see, today’s lofty asset prices must have a target on their bubble.