Juggling Dynamite

Traditionally the Canadian dollar has tracked global demand for the nation’s rocks and trees.

As shown in the chart below, the connection between Canadian exports and the strength of its currency historically reflected in a correlation between Canadian resource-based venture companies (CDNX Index) and the loonie.  In 2011 as central banks went full nut-job with herculean promises of monetary power, the resource sector remained unconvinced and followed global manufacturing output lower, while the C$ weakened to a lesser extent.

Over the past couple of months, the loonie has rejoined the resource sector’s trajectory but with a glaring gap now evident between the two.  This morning wildly volatile, the Canadian dollar index has now broken below cyclical support that had held out of the 2009 recovery.  Further downside to at least the last recession bottom in the .80 range seems probable, with further declines possible into the .70’s after that.

Scott Gottlieb, American Enterprise Institute, explains how circumstances are different with the current outbreak of Ebola from other outbreaks.  Here is a direct video link.

The head of the Bank of International Settlement’s market committee, Guy Debelle, warned in a speech in Sydney this week that “global markets are dangerously stretched and may unwind with shock force as liquidity dries up.” In addition, Debelle added that investors have become far too complacent, “wrongly believing that central banks can protect them, while making shaky bets that are bound to blow up at the first sign of stress.”

Worse than the 2008 crisis, Debelle pointed out that the world has never been more leveraged than it is today with debt ratios far higher today than the peak of the last crisis. While advanced economy debt levels peaked at 250% of GDP in 2007, since then they have risen to more than 275% as shown in this chart.

At the same time, interest rates are already at zero across most of the industrial world: “that is a point we haven’t started from before” when heading into a global downturn, Debelle pointed out. This means monetary tools that have historically been used to help truncate downturns are not available this time. See: BIS warns on ‘violent’ reversal for global markets

Make no mistake: the next bear market is no black swan.  It has been well earned, and participants have been amply warned.