A new report from economists at ING (which you can download here) looks at which economies are being hit hardest by the coronavirus supply chain shock and concludes Canada and Germany are the biggest losers:
“Of the world’s 10 largest economies, Canada suffers most from the fallout of foreign supplies and Germany suffers most from weaker foreign demand.”
Canada’s economic weakness is corroborated by a massive hit to our labour market in March –1.55 million Canadians applied for employment insurance along with a 24% drop in job postings for the week ended March 27–a much larger hit per capita than comparable U.S. data. See: Hiring in Canada drops more than the U.S.
Well before coronavirus, Canadians were filing for insolvency relief in 2019 at the highest rate since the 2008 recession because, at 101% debt to GDP, Canadian households were already the most indebted of all G7 nations as shown here.
When the commodities boom went bust in 2008, Canadian policies incentivized borrowing to fund consumption and malinvestment in share buybacks, as well as doubling down on the dying oil and gas sector, rather than new technology and business models aimed at energy efficiency and innovation. This was a grave mistake. Canada is now suffering the consequences of being highly-levered, under-diversified and unprepared for cash flow disruptions.
At the same time, what savings Canadian households and pensions do have has been indiscriminately allocated to over-valued corporate securities. We warned about the risks of this in our January 2018 client letter “Ludicrous Mode”:
“investing with high leverage (i.e., borrowed funds or derivative products) is like driving 200 miles an hour everywhere that you go. So long as weather is perfect, there are no turns, no judgement or mechanical problems, and nothing ever comes into your path, you will undoubtedly get to your destination faster. But as soon as anything does occur, you have a huge probability of wiping out yourself and your surroundings.
…The fact that record margin debt is now pledged against hundreds of different indices, ETFs and tracking funds all holding the same shortened list of stocks, means the forced selling ‘margin calls’ in falling markets is likely to bring unprecedented momentum and contagion as well.”
We also warned that the speed of the take-back phase in such conditions was set up to be breath-taking: “those riding on irrational exuberance today will give back 10+ years of what they thought were gains in a matter of months. Dreams will be dashed, retirement plans capsized, and years wasted trying to grow back losses.”
It turns out, we were not quite pessimistic enough–it took less than one month to evaporate 14 years of market gains in March. Already, the TSX has retraced to the level it first reached in 2006 and is just 11% above its cycle peak in September 2000. This proves once more that irrational asset pricing is no free lunch–never has been.
Foreseeing the giveback phase now underway was not clairvoyant, it simply required understanding how secular bear markets historically have moved from points of extreme valuation to points of undervaluation over 18 to 20 year periods. I wrote about this phenomenon and its implications in my 2007 book Juggling Dynamite, and the content remains timeless.
World risk markets bounced into month-end as funds and managers rebalanced their long-always allocations. However, one-month-does-not-a-bear-market-complete and bending the coronavirus spread–while critical–will not solve the financial problems now sweeping Canada and most of the world. For an excellent review of why see: If the virus hadn’t caused the crash, something else would have.
Bear markets are multi-quarter messy affairs that grind buy-the-dippers down over time. As shown in my partner Cory Venable’s chart below of the TSX composite since 1995, the last two bear market cycles since 2000, lasted 24 and 9 months respectively (see rectangles) and included big rally days and weeks while on the journey to halving. This is typical. The price action so far (right rectangle) has been sharp but too short.
Buy-the-dippers will need to learn the hard way, again. Central banks and product-sellers have encouraged rampant gambling over the last few years. These are the same folks that never suggest cashing out to leave the casino when you’re up. Take note.
The third cyclical decline of the secular bear that began in March of 2000 is now in motion. The TSX and S&P 500 could easily fall another 25%+ over the next few quarters and spend years thereafter waiting to make back losses.
Prudent financial plans should take probabilities into account.
