Juggling Dynamite

Since December, despite a parabolic move in fossil fuels (priced in U.S. dollars), the Canadian dollar has not followed along for the ride.  This is not a bullish vote on Canada (see chart below and Canada’s currency washed out by U.S dollar haven appetite.)  With money supply and trade now retreating globally, asset bubbles are bursting, and highly levered participants increasingly need cash to make a mountain of payments.  The lion’s share of payments globally is due in U.S. dollars.

Yes, Canada has oil and gas, and 12% of the TSX index comprises companies in the space.  But, for years now, the bulk of our economic momentum has come from blowing up a housing bubble and the TSX Index, which most Canadian portfolios and funds track, has a third of its weight in financials (nearly three times the weight of fossil fuels).

Financials do not fare well late in credit cycles as the yield curve moves to zero and then inverts.  Canadian financials halved in the 2001-02 and 2007-09 bear markets and tumbled 27% in the 15-day plunge in March 2020.  And Canadian debt levels in households and corporations are much more extreme, coming into this downturn, than any time in the last 22 years.  Cash flows were already tight without any rate hikes, and the recent leap in food and fuel prices taxes daily consumption and exacerbates broad financial strain.

Financials and the TSX Index remain heavily overbought, concentrated and overvalued in this environment.  Buy and holders be warned.

In this clip, David Rosenberg offers a good summary and updates on the Canadian interest rate cycle.

David Rosenberg, president, chief economist and strategist at Rosenberg Research, joins BNN Bloomberg to discuss his reaction to the Bank of Canada’s first interest rate hike since 2018. He notes that if the BoC and the U.S. Federal Reserve really want to get inflation down, aggressive rate hikes will come at the expense of the economy. Here is a direct video link.

Macro and market pressures that were intensifying over the past year have been compounded and accelerated by Russia’s assault on Ukraine.  While the cyclical downside for asset markets and the economy is higher than average today, the investment opportunity on the other side also promises to be historic.

First, we need to get capital from here to there safely–and that requires defensive positioning, patience, and price discipline.  Sadly, most participants are, once again, set up to lose and not benefit from the mean-reversion cycle.

The discussion below is worthwhile.

Financial system stability, especially in the all-important bond market, was eroding at a concerning pace prior to last week.  But Russia’s recent invasion of Ukraine is serving as an accelerant to the situation…

To give us an understanding of the key risks to monitor, we speak with investor & market analyst Gordon Long who provides a detailed explanation of why disrupting capital and trade flows out of Russia will create a domino effect of instability.  One that, if left unchecked, could possibly trigger a “Lehman moment” for the global financial system.

Yet despite this, Gordon believes the road ahead is filled with opportunity for the savvy investor. Here is a direct video link.

Our February client letter is on the housing bubble casting a pall over Canada’s economic prospects and social stability. The last decade of free money has been anything but. Costs are compounding through reduced household formation, non-replacement birth rates, decreased savings, excessive debt, misallocated capital, and a shortage of investment into longer-term productive sectors, activities and innovation.

For years now, investigative reporter and Wilful Blindness author Sam Cooper has flooded his readers, and all layers of our government, with proof of the money-laundering-inflows helping to make Canadian realty a destructive wild west. The paper trail has been largely ignored. Cooper continued to illuminate this week, see Over $154m tied to detained Chinese-Canadian Oligarch invested in Toronto Real Estate. This is the tiny tip of an iceberg.

As the world hunts to freeze and seize the property of Russian oligarchs, Canada needs to look inward. If the government can shut down the flow of funds to trucker protests, they can certainly curtail large illicit flows. Complexity and platitudes without serious enforcement have to end.

Unaffordable housing prices are no free lunch. Watch why Canadians should care about money laundering in real estate. Here is a direct video link.