Juggling Dynamite

Admit, repent, reform, recover…

Martin Wolf talks about his new book ‘The Shifts and the Shocks’, what has been learned from the financial crisis, and how elites can regain credibility in the wake of the crisis. Here is a direct video link.

Despite the circus of purported ‘love’ around former BOC head Mark Carney (who wisely left for England last summer before the Canadian credit bubble could burst), a short honeymoon phase for newcomer Governor Poloz, and glowing self-endorsements of bank owned wealth manglement dealers across the nation, the Bank of Canada and its Canadian banks are today not the model of strength and stability they have been pumped up to be. Indeed far from it:

“Any strong, healthy banking system requires a central bank with a pristine balance sheet… specifically, substantial net equity as a percentage of assets.

So how strong is the balance sheet for Banque du Canada? Not very.

As it turns out, Banque du Canada is actually the most pitifully capitalized central bank in the western world. They’re in such bad shape they actually make the Fed look healthy…See: Presenting the most pitifully capitalized central bank in the west“

Canada’s realty market was recently ranked as the most highly valued in the world today with a home price to rent ratio 88%, and home prices to income 32%, above historic norms. (Although I am sure one can take comfort from the fact that the Bank of Canada, in true central bank tradition, says they see no realty bubble). In fact of all the countries who had housing booms on the global credit bubble up to 2008, Canada, Norway, Australia and New Zealand are the only countries to have not had the mean reversion phase in prices.  Yet.

But as the global downturn spreads and commodity price deflation continues for a few more years while the world works off the excesses of the 2000-2008 over-investment boom, Canadian employment will likely continue to weaken, and our hideously indebted consumers will struggle and the highly over-paid banker-leverage-magicians will finally be revealed as unworthy leaders.  Once more.   Unfortunately with bank reserves and CMHC funding all inadequate for the debts that have been under-written, Canadian savers and taxpayers are likely to be the unhappy lenders of last resort.

Sam Zell effectively rips the marketing wrapper off the investment sales puff in this one simple statement: “What’s the definition of safe?  That the stock doesn’t go down.” That is the way real people think about “safe” but it is certainly not what risk markets at today’s record valuations offer.

Sam Zell, Equity Group Investments Chairman, provides perspective on current investing trends, and explains why he thinks a correction is likely. Here is a direct video link.

With stock and corporate bond prices back at cycle peaks, those holding them and thinking their money is anywhere within the realm of “safe” are setting up for a very rude awakening. Particularly those who have retired too early in the past few years or are about to, thinking they are now “conservatively invested” with their savings in stocks and mutual funds in order to live off the dividend income. The next downturn is likely to send many back looking for work to fund their living expenses and build back up their savings. Freedom 75 or 85, maybe?

At least Fed members like Janet Yellen will have a very generous government pension to live on. And they can collect speaking fees in retirement explaining why they tried their best theories and the third devastating asset bubble since 2000 was not anyone’s fault.