Juggling Dynamite

We interrupt the mayhem in global asset markets for some rare and valuable context,  see Jeremy Grantham doubles down on crash call, says sell-off has started:

In a note posted Thursday, Grantham, the co-founder of Boston asset manager GMO, describes U.S. stocks as being in a “super bubble,” only the fourth of the past century. And just as they did in the crash of 1929, the dot-com bust of 2000 and the financial crisis of 2008, he’s certain this bubble will burst, sending indexes back to statistical norms and possibly further.

That, he said, involves the S&P 500 dropping some 45% from Wednesday’s close — and 48% from its Jan. 4 peak — to a level of 2500. The Nasdaq Composite, already down 8.3% this month, may sustain an even bigger correction.

Grantham’s latest 12-page public service announcement can be read here: Let the Wild Rumpus Begin.  He also discussed the analysis on Bloomberg this week, but the full segment video is not yet posted.  The snippet below is their teaser.

Grantham detailed his call for a crash in the S&P 500 and  explains why central bank efforts to prevent a major selloff are unlikely to succeed. He spoke exclusively to Bloomberg’s Erik Schatzker on Bloomberg’s “Front Row.” Here is a direct video link.

Hoisington Investment Management’s fourth-quarter 2021 Review and Outlook is now available on their website here.   Always worth a mull.

Bottom line:  Global growth is slowing in 2022 under record debt, poor demographics, negative real yields and wages that undermine spending and productivity-enhancing investment.  China is looking a lot like Japan did in the 1980s. With emerging economies under increasing stress, Treasuries and U.S. dollars remain relative safe havens that should attract global inflows in 2022:

“Due to poor economic conditions in major overseas economies, 10- and 30-year government bond yields in Japan, Germany, France and many other European countries are much lower than in the United States.  Foreign investors will continue to be attracted to long-term U.S Treasury bond yields. Investment in Treasury bonds should also have further appeal to domestic investors, as economic growth disappoints and inflation recedes in 2022.”

Since December, a global jump in rate hiking expectations has caused bonds to sell-off. Both U.S and Canadian ten-year treasury yields are above 1.87 this morning, the highest since before the pandemic began in 2019.

The 30-year U.S. Treasury yield on which widely referenced 30-year U.S. mortgage rates are based is above 2.26 and the highest since last October. As shown below, courtesy of Charlie Bilello, U.S. mortgage rates have already increased more than bond yields and, at 3.7% today, are the highest since early 2020. Housing affordability, meanwhile, has deteriorated significantly since 2020 because average home prices are now about 30% higher nationally. The S&P Case-Shiller U.S. National Home Price Index is below since 2003.

Variable mortgage rates rise when central banks hike base rates, and half of the mortgages taken on in Canada last year were variable. Already, just the expectation of coming rate hikes has caused the 5-year Treasury yield (on which 5-year fixed Canadian mortgage rates are based) to rise to 1.72% and 5-year mortgage rates have increased 43% from 1.39 on January 1 to 2% today. Five-year rates were last this high in December 2019, but again, average home prices were 30% cheaper back then.

While the Aussie and New Zealand dollars have weakened over the past year on slowing demand for commodities and weakness emanating from China, the Canadian dollar (FXC index), below from my partner Cory Venable since 2019, has rallied over the past month on a jump in oil prices and posturing about rate hikes.  Higher oil and rates slow spending.

Bonds have now priced in six Bank of Canada (BOC) hikes over the next year, with a 75% probability of the first announced at next week’s January 26 BOC meeting. See Rate hike in play after hawkish bank of Canada survey.

Lest anyone forget, housing has been the dominant driver of Canadian GDP growth for several years now, just as it has been in China. The slowing of able buyers has negative implications overall.

Stagnation or a retreat in home prices–while better for longer-term stability–will magnify the strain on highly leveraged households, developers and lenders in several countries. This is one of the main reasons that we doubt central banks will tighten as much as presently priced into bonds and the Loonie.  We expect treasuries to rebound again and the Loonie, commodities and equities to weaken, as financial fragility dawns.