Juggling Dynamite

Danielle was a guest today with Jim Goddard on Talk Digital Network discussing recent trends in the world economy and markets. You can listen to audio clip of the segment here.

Quite a sight this morning to see Mr. Carney, former Bank of Canada head, now leading the Bank of England, announcing new policies he says are designed to help financial instability risks building from over-valued housing and high household debt levels in the UK. Here is a direct video link.

Better late than never to be sure. But as all ears hang on Mr. Carney’s eloquent words and educated assurances, there is some irony to be found in the below big picture chart showing that ultra-loose monetary policies the past 5 years (which were led by Mr. Carney) have left Canada today with the most over-valued home prices in the world. Hand in hand of course, with the most indebted households.

As Mr Carney explains in the clip, studies have shown that when home prices ultimately correct from over-valued periods “you end up with a recession that is much deeper…recessions associated with housing crashes are about 3x as deep as average recessions.” So as commodity prices continue to slump amid a sea of over-supply and weak global demand, the Canadian economy is the least prepared to absorb the downturn than it has been in least a couple of decades. Too bad policy makers and bankers are so adept at closing stables long after horses have run wild. I look forward to the day when the most dominant news stories are no longer about the ‘brilliance’ of central bankers.

Further to my Relentless rally chasing bears to near extinction, comes this big picture chart showing today’s equity bulls over bears spread back where it was at the last deluded market peak in 2007. See also this good overview of more bubbly indicators: Fantasy stocks for a fantasy market.

Meanwhile corporate earnings, that had achieved unprecedented levels (70% above historic norms) coming out of the lean cost structures of the 2008 Recession (See Big holes in bullish case), have been steadily losing steam as shown in this next chart below courtesy of Pimco this week graphing the S&P price on top versus S&P earnings growth (or near lack there of over the past year)on the bottom.

And as for all the talk about a big rebound in 4th quarter earnings? So far corporations have pre-announced negative to positive outlook changes 10.6 to 1 as shown below. But then maybe the bulls are right: who needs earnings or customers, when markets have the Fed? Party on Garth!