Juggling Dynamite

As Democracy Now! broadcasts from the United Nations climate summit in Marrakech, Morocco, the U.S. special envoy on climate change, Jonathan Pershing, says no one from President-elect Donald Trump’s transition team has reached out to him to discuss U.S. climate policy. This all comes as the World Meteorological Organization is projecting 2016 to be the warmest year on record, and Trump has vowed to withdraw from the Paris climate agreement. “Legally he can’t, and politically it would be a disaster,” says economist Jeffrey Sachs, director of The Earth Institute at Columbia University. “If Donald Trump goes in the way that his rhetoric … has portrayed, we’re going to have a brawl in the United States.” Here is a direct video link.

Further to the  vulnerability in insanely valued, heavily levered Canadian housing today, real estate investment securities reflect potentially even greater downside risk.  After all, at least you can live in housing as the price goes down (if you can maintain the payments), but for those holding real estate investment trusts (REITs), plunging price has no offsetting consolation or utility–just capital losses and mental torture.

As shown here on the Blackrock website, the Canadian (XRE) REIT reports a mix of realty types but as CMHC has pointed out, a downturn in Canadian home prices should be expected to spike unemployment and lead to an overall recession which will have knock-down effects on other wildly over-built areas like retail and office. (Diversified REIT’s are just those who do not break out their specific weights in each of the sectors).

Here is a chart of the US commercial property index to get a sense of how far prices have lept since 2009.

Below is my partner Cory Venable’s chart of the Canadian real estate investment trust (XRE) since 2002.  Arguably even more than 2008, price risk is u-u-u-g-e at the moment.  On the other hand, a mean reversion of 30 to 50% would go a long way in increasing yield and restoring investment prospects once more.  Unfortunately those who have been buying these securities in search of income the past few years, will be side-swiped.  Wise to wait on the sidelines for now. Much better entry points are likely as this cycle completes.

This is a necessary part of the solution. By demanding higher capital ratios of big banks, reckless bets will be curtailed, taxpayer risk reduced, and the too big to fail financial monsters will be incentivized to reorganize themselves to more responsible, self-insuring structures.

Federal Reserve Bank of Minneapolis President Neel Kashkari doesn’t accept the idea of letting an occasional financial crisis happen. Kashkari offers details on his plan to end the problem of ‘too-big-to-fail” banks on “Bloomberg Daybreak: Americas. Here is a direct video link.