Juggling Dynamite

The Canadian dollar soared with the commodities bubble from 2002 to 2007, imploded with the credit bubble and global recession in 2008, rebounded with QE hopium into 2011 and has been falling steadily with global growth ever since.

As captured in the chart below, last week the C$ Index broke below its secular support in place since 2002 around $92. Today as the Bank of Canada warned of slowing growth and falling inflation, the loonie confirmed the thesis and broke below $90. Next support level is in the $82 area as marked below. But if this secular mean reversion story holds, and the global economy continues to disappoint from here, we could see the C$–a currency of global risk speculating–fall back below $70 in the months ahead.

Hard for most to believe I know. But the seeds of this down cycle were sown in the extreme optimism and over-confidence in Canada (and global demand) built during the 2002-07 credit boom, and excessive domestic debt building in Canada since. It’s pay back time.

Economic Cycle Research Institute co-founder Lakshman Achuthan on the state of the economy. Here is a direct video link.

Had to chuckle at his closing lament about not having adult conversations on the economy…5 minute, media segments with big-haired-teleprompter-readers aside, of course…

I was heartened to read former Fed Reserve official and QE bond buyer Andrew Huszar’s candid op-ed in the Wall Street journal admitting that the Central Bank knew QE was not working as a stimulant for the economy back in 2010 during the first round. But, he explains, already at zero rates, they had no other ideas that would help the economy. So they just kept rolling out more tranches of the same over the past 4 years. Read the whole article here if you missed it: Confessions of a Quantitative Easer.

At the time I did not see this Bloomberg interview of Huszar where he further explains why he apologizes for his role in continuing to implement QE when it helped the economy so little but buoyed bankers and bullish sentiment back to extremes. The aftermath according to Huszar: today “we are eerily similar to 2008.” I was glad to hear someone on the inside admit this…as I have been saying it for the past three years. Glad to hear its not just imagination or madness on my part. Worth listening to this discussion. Here is a direct video link.

And then in December…the Fed started to taper, saying it plans to steadily back off its QE efforts with a view to exit by the end of the 2014. An ongoing withdrawal of QE from capital markets is no new threat to a sluggish economy. QE was not helping that anyway. But asset markets? Think the downside of monetary heroin withdrawal is all priced into today’s valuations at epic highs???