Juggling Dynamite

Meanwhile, in the real economy, where companies with fewer than 100 employees are the largest economic driver, employing two-thirds of Canada’s private labour force, survival prospects are getting worse.  See Small businesses rack up loans to survive:

The Canadian Federation of Independent Business (CFIB) estimates that, based on a recent survey of its members, about seven in 10 small businesses have taken on new debt because of the pandemic, with an average debt of almost $170,000 each.

But there is a huge disparity between industries: Businesses such as restaurants and gyms, which have faced more operating restrictions to stop the spread of COVID-19, have taken on much more debt than those whose work can more easily be done from home. About nine in 10 businesses in the hospitality and recreation sectors said they incurred debt related to the pandemic, with average debt loads of more than $200,000.

“This doesn’t look like there’s going to be a quick recovery based on the amount of debt that businesses have taken on,” said Laura Jones, executive vice-president at CFIB. “Even if sales come back in the summer, they’re still worried about outrunning their debt.”

The 2-hour live stream with 97-year old Charlie Munger yesterday (youtube clip here) was slow-moving but still a breath of fresh air for the few remaining souls not intoxicated with speculative manias, brokers and investment bankers.  A couple of my favourite quotes:

“The investment banking profession will sell shit so long as shit can be sold.”

“[Commission-free trading] is not free.  When [you’re paid] for order flow you are probably charging your customers more in pretending to be free.  It’s a very dishourable, low-grade way to talk.”

Amen, brother.  There are few insiders willing to call bullshit on this mess.

In the clip below, CNBC’s Becky Quick recaps some of the highlights.

Berkshire Hathaway Vice Chair Charlie Munger sounded the alarm on the SPAC craze at Wednesday’s virtual annual meeting for the Daily Journal. Munger answered shareholder questions via a Yahoo Finance livestream. CNBC’s Becky Quick reports. Here is a direct video link.

In a Wall Street Journal interview today, Munger added:

“I hate this luring of people into engaging in speculative orgies, [Robinhood] may call it investing, but that’s all bullshit.”

“If you are selling them gambling services, where you rake profits off the top like many of these new brokers who specialize in luring the gamblers in, I think it’s a dirty way to make money, and I think that we’re crazy to allow it.  I think civilization would do better without it.”

Commodity prices and inflation expectations (below since 1995) have been following government and central bank stimulus flows higher over the past six months.  This is no all-clear sign for risk markets or the economy—quite the opposite.

Treasury yields have moved higher for the ride. From a low of .43% on August 20, 2021, Canada’s 10-year yield is now 213% higher at 1.349%, and US Treasury yields 178% higher from .51% in August to 1.42% today.

Near-term rates are more hinged to central bank policy rates, so they have moved less, but the 2-year Canada yield is still up 72% from .148% at the start of the year to .255% today and the US 2-year yield at .129%, up 17% from last August.

The difference in the 2 and 10-year rate moves have served to steepen the yield curve, as shown below in my partner Cory Venable’s chart of the US 10 minus 2-year spread since 1990.  The spread between these two closely watched yields moved above 1.25 this month and significantly above the .81 threshold breached at the end of December. 
In the past three economic cycles, a breach of the .80% spread line (dotted above) saw the gap max at 2.6% amid an intensification of economic recession.  This then prompted another relapse in longer-term rates (see three blue arrows marked) as over-optimistic growth expectations downsized. We suspect a similar pattern will follow as 2021 progresses.

Higher commodity and interest rates weigh heavily on spending and recovery at this part of the economic cycle because jobs remain missing in action, and employment losses during this recession are heavier than average.

With thousands of small businesses now closed, Canada is missing some 850,000 jobs and America about 9.4 million. For some big picture, the US employment to population ratio today is 57.5%, down from 61.1% before the 2020 recession began, and compared with 59.4% at the worst point of the 2008-09 Great Recession (source:  Rosenberg Research).  It typically takes years before the employment ratio can reclaim its prior cycle high.

Low-interest rates can be constructive in helping people pay back borrowed funds faster.  But when they encourage more borrowing for the already heavily indebted and more expensive home prices, lower rates have the opposite effect:  extracting directly from future spending potential.  This is us.

If historical norms hold, longer bond yields may rise further, and the 10-2 curve steepen perhaps another percent.  This should then provide another valuable buying opportunity for government bonds and the US dollar as equity and commodity prices relapse into the next leg of the bear market that was temporarily interrupted last March.