Juggling Dynamite

Canada was relatively sheltered in the 2008 recession thanks to higher home equity and lower household debt heading into the downturn.  Not this cycle.  And unlike the quick central bank induced bounce back in 2009, the current quagmire is likely to persist longer.

The latest MNP Consumer Debt Index published Monday shows 50 per cent of respondents said they’re within $200 of not being able to cover their monthly bills, and nearly an equal proportion of participants in the survey (49 per cent) said they aren’t confident in their ability to cover expenses without going deeper into debt.

“Our findings may point to a shift among some Canadians from debt apathy to debt hopelessness. Feelings of hopelessness can make people feel like giving up on ever paying down their debt or, worse, ignoring the debt as it piles up higher,” said MNP President Grant Bazian in a release.  Here is a direct video link.

Consumer credit strain is compounding in China as well, see: China’s middle class frets the ‘good times’ are over, amid sliding house prices, stagnant wages.

A decade of record-low interest rates has herded capital globally into the same buffet of risky assets. Most of the participants have little cash and many are highly levered. This is a time-tested recipe for forced selling and capital implosion. It won’t be different this time.  Unlike individuals, the Canada Pension Fund has the luxury of a 40-year+ time horizon and regular inflows monthly, so they run with a fully invested mandate.  But as they experienced in 2008, that doesn’t protect CPP from the forced-selling carnage of others around them.  CEO Machin discusses liquidity risks in this clip from Davos.

“I do ring the alarm bell on not to be too invested in illiquid assets,” Mark Machin, chief executive officer of the Canada Pension Plan Investment Board, said in a Bloomberg Television interview Monday at the World Economic Forum in Davos. “We are very comfortable with our risk models and what we would do in various lurches down in markets, but I do worry about the expansion of a lot of funds like us around the world into private illiquid assets.”  Here is a direct video link.

I understand from stock bulls that central banks have got all this under control.  That’s good, because even India, the world’s fastest-growing large economy, has taken its growth rate estimate for the current fiscal year ending March 31 down to 5%–the slowest growth rate since 2009 and compared with a peak of 8.2% in 2017.   See India’s Modi faces a new challenge:  a slowing economy:

As in most countries today, dramatically slowing growth is making it harder to create jobs, cover expenses, repay loans and save/invest for the future.  This is feeding rising social unrest and instability as well as a surge in loan defaults and writedowns.  The latter is a clear and present problem for euphoric financial markets.