Juggling Dynamite

As we have seen repeatedly, when governments are backstopping financial intermediaries lenders naturally become less diligent and more focused on profits than on risks, on quantity rather than quality of loans. This has been the Canadian experience in spades over the past decade…and the risk to taxpayers is still building, with a tab yet to be determined.  P.s  The taxpayer-backed risks are larger than ever in the US mortgage market as well.  See:  Fannie and Freddie are Back, Bigger and Badder than ever 

Bruce Joseph, Principal Broker, Anthem Mortgage Group, and Ben Rabidoux, President, North Cove Advisors, join BNN to discuss the prevalence of fraud and role of regulators in Canada’s mortgage industry. Here is a direct video link.

Footnote on Economist Sherry Cooper speaking at the outset of clip: after a long career as Chief Economist/investment sales cheerleader for BMO Capital Markets, Ms. Cooper recently took a position as the Chief Economist/mortgage sales cheerleader at Dominion Lending Centres (who’s website says they collect brokerage commissions on more than 50,000 mortgages sent to Canadian lenders each year). Unsurprisingly, Ms. Cooper’s assessments are all very positive on the stability and integrity of the Canadian mortgage market!

Of course, BMO being a corporate underwriting/investment sales franchise, was not forecasting a drop in crude before it happened, and they are still calling for a rebound, but…the comments here are starting to acknowledge the gravity of a sustained oil drop for Canada.  For more see:  Global oil supply grows at ‘breakneck speed’, says IEA.

The price of crude slid further on concerns of slowing Chinese growth, and Benjamin Reitzes, Senior Economist, Vice-President at BMO Capital Markets says further downside risk to oil could put Canadian growth in jeopardy into the second half of the year. Here is a direct video link.

The more historically realistic US GDPNow model forecast for Q3 2015 real GDP growth (seasonally adjusted annual rate) was 1.0 percent on August 6 (green dot below) compared with the still much higher 2.6 to 3.6% range of consensus forecasts (blue band below). The consensus range, shared by Central Bankers and investment sales firms everywhere, continues to be senselessly, relentlessly optimistic only to be revised much lower in retrospect.  (And let’s not forget that the meager August 6 GDPNow estimate was days before this week’s ‘surprise’ currency devaluation from China, which will now make US (and European) goods and services that much less affordable for Chinese buyers).  You can see more on how GDPNow estimates are calculated here.

This huge gap between realism and consensus matters because the majority of financial types are justifying today’s lofty asset valuations in large degree, on the misguided consensus growth assumptions--a significant amount of which was penciled in as coming from China.  Nominal GDP growth is roughly correlated with corporate revenue growth; and so faulty assumptions on top line growth and inflation, become precarious foundations on which to construct valuation beliefs.

It is only when asset markets crash enough to scare consensus-following-sheep off bullish marks, that truly valuable investment opportunities present for the few sober realists ready to capitalize on them.  That time of role reversal–where today’s careful bears become tomorrow’s only bulls–is coming sure as winter, somewhere in the months ahead.