Flattening curve: ticking clock on this over-extended cycle

As the stock market parties like it’s early 2000, a historically reliable indicator of economic weakness, the yield curve, continues to raise alarm in North America.  The spread between 2 and 10 -year US Treasury yields reached a new cycle low of .75 this week, and in Canada .51.

As show below in my partner Cory Venable’s chart since 1975, when these spreads reach zero, a recession is underway or close at hand.

In the present extraordinary cycle though, with central banks so aggressively influencing both ultra-low short-term yields, as well as longer term rates with QT (quantitative tapering), the question is whether a classic inversion of the curve will happen this time, or whether something close to zero may be close enough (for hand grenades).

One thing for sure, the timer is running down on this expansion cycle, and it’s never a question of if, but only when, the next recession and bear market arrives. They’re overdue. Who’s prepared?

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Tulip Mania revisited

We watched the recently released film Tulip Fever last night.  The main plot focuses on two pretty sexy love stories, but the more interesting backdrop is the speculative mania that swept Holland in the 1600’s known as Tulip Mania.  Here is a direct link to the trailer.

The episode is described as one of the first recorded speculative bubbles in Charles Mackay’s famous, must-read book Extraordinary Popular Delusions and the Madness of Crowds (1841).   The contract prices for bulbs of the then recently introduced tulip, reached extraordinarily high levels before collapsing in February 1637.  As shown on the left, at the peak of the madness, one bulb of rare varieties traded for 10x what a skilled craftsman could earn in 10+ years of work.  At one point, 12 acres of farm land were pledged for just one bulb.  (More recently, it has been argued that the scale of the mania was not as far-reaching as Mackay and others have reported.  Yet the frantic trading of rare bulbs at exorbitant prices that ultimately collapsed, is undisputed).

The story is classic human behavior and well worth revisiting.  Especially as the world is now in the midst of what will undoubtedly also be recorded as one of the greatest and most damaging financial bubbles in history.

Of course, you could, if starving, eat tulip bulbs.  Pieces of paper and digital entries representing ‘ownership’ in grossly inflated securities on the other hand–not even edible.

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Zero tolerance necessary for phone use behind the wheel

Electric autonomous vehicles are a technology that’s time has come for many reasons.  Avoiding unnecessary carnage, cost and loss from intoxicated and inattentive drivers is a huge one.

In the meantime, as with drinking and driving, zero social and legal tolerance are necessary to effect behavioral changes.  (Send this documentary link to anyone you know who is still fiddling with their phones while driving).

After falling for 35 years, road fatalities have been increasing again for the past two years with the proliferation of ‘smart’ phone use.  But for the evolution of safety features like seat belts and airbags, you have to believe that the number of road fatalities today would be higher still.  Bikers and pedestrians are not so lucky.  And of course, it’s not just fatalities.  For injured survivors, their families and taxpayers, there are lifelong costs and suffering.

Publishing accurate facts on the cost and carnage is also critical. Right now, that is not happening. See: Smartphones are killing Americans, but no one is counting.

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Canada extends stress tests to uninsured mortgages in 2018

The Canadian Office of the Superintendent of Financial Institutions this morning announced stress testing rules will be expanded to include both uninsured and insured mortgages in Canada.

Starting January 1, 2018, Guideline B-20 requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.

In addition, federally regulated financial institutions are prohibited from doing additional credit arrangements in any form that circumvents the institution’s maximum loan to value ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.  See today’s OSFI Bulletin release here.

These changes are long overdue and just a few more steps in restoring some prudent lending rules in what has been a decade of wild west credit abuse in Canada.  In the longer run these moves are important in shoring up more stable financial foundations for households and the economy.   In the near term though, it is another move likely to help mean revert Canadian real estate sales and prices.  And the process will not be pain free.


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‘Big Short’ Eisman: Canada due for ‘pretty severe correction’ in credit cycle

Canada’s housing market is “ripe for a pretty severe correction” with Canadian Imperial Bank of Commerce the most vulnerable, according to Steve Eisman, a fund manager at Neuberger Berman Group LLC. Here is a direct video link.

“In Canada, there’s some pretty good evidence that the housing market is finally starting to turn over,” Eisman said in a Bloomberg TV interview on Monday. “Canada is not going to crash, but it hasn’t had a credit cycle in 25 years. I think they’re about to have one.”

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Downsizing expenses and waste: a trend whose time has come

We’ve been writing for some time about secular trends that will increasingly urge baby boomers to downsize McMansion-style homes.  Not only do people physically want less property upkeep as they age, but the drop in ‘safe’ income yields from 5 to 6% in 2007 to 1 to 2% today, has increased pressure on retirees, and those contemplating it, to reduce operating expenses and extract cash from their house asset.  Where a million in savings could pretty safely produce 50K a year of income a decade ago, today it can produce about 20k.  In other words, we need about 2.5x more savings today, to produce the same retirement income, as we did 10 years ago.  Something has to give, and it’s living expenses.

At the same time, not only do younger buyers generally lack the down-payments and income ability to buy McMansions, they also lack the interest.  Most are wisely attracted to more efficient housing with lower operating and environmental costs.

A recent survey by the Ontario Securities Commission found that 45% of pre-retired Ontario homeowners age 45 plus, are relying on the value of their home increasing from present (already lofty) levels to fund their retirement. The survey also found that while 73% of this group own homes — half of those still have a mortgage and half have no investment savings at all.

For those thinking that they will need or want to downsize their home to raise cash and lower expenses within the next 5 years, best to take proactive steps sooner than later.  See Boomers worry they can’t sell big homes when the time comes:

For owners of large homes near retirement, the best thing they can do is to close a sale while the sellers’ market is hot…

You can also invest in energy efficient and green technologies that make maintaining a large home more affordable, update the kitchens and baths, and remove the emotion from your decision.

This unsustainable era of oversized people, homes, expenses and debts is coming to a close of necessity.  The future will be leaner in every way.  And that is a good thing for those who can see and evolve their habits and thinking now.

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