Juggling Dynamite

Building Wealth in a Challenging World – Debt Free In 30 _ A Personal Finance Podcast – Ep. 248. The rate at which Canadians are saving has dipped to the lowest in more than 10 years. A lack of money saved means more Canadians are relying on debt for events like retirement or an emergency expense. In today’s challenging economy, how can someone build a better financial cushion? Our podcast guest, portfolio manager and finance author, Danielle Park, explains that to keep up, one needs to have more balance between income and investments. Here is a direct video link.

I just finished Michael Lewis’s latest book, The Fifth Risk: Undoing Democracy.

Lewis examines key US government departments like Agriculture, Commerce (which should be called the ministry of data on things like weather and food production), and Energy. He describes the many vital duties these departments are responsible for, and what happened when the Trump administration took over.  Full of his famous character studies,  this material becomes a page-turner.  It also sheds light on the strategy of many in positions of power to not delve in and understand the issues in detail so that they can skirt responsibility and cling to preconceived narratives.  Some insight for those of us trying to comprehend what we are witnessing in many government and big business leaders today.  Here’s a taste:

“Willful ignorance plays a role in these looming disasters. If your ambition is to maximize short-term gains without regard to the long-term cost, you are better off not knowing those costs. If you want to preserve your personal immunity to the hard problems, it’s better never to really understand those problems. There is upside to ignorance, and downside to knowledge. Knowledge makes life messier. It makes it a bit more difficult for a person who wishes to shrink the world to a worldview.”

Risk assets have taken a fresh thumping in May.  As of last night, the S&P 500 index was down 5.5% on the month, with energy (-9.2%), technology (-8%), materials (-7.4%), industrials (-7.1%) and financials (-5.6%) faring worst, and so-called ‘defensives’: real estate (-.05%), utilities (-1.6%), health sick care (-2.3%) and consumer staples (-2.9%) faring less bad, as shown above from Yardeni Research.

Canada’s TSX stock index lost about half as much as the S&P 500 this month, but still -2.7%, again with economically sensitive energy stocks (-9.77%), materials (-7.66%) and financials (-3.43%) faring worst, real estate (1.5%) best; gold producers (-1.4%), and dividend-paying stocks (-2.33%) less bad, as shown above from my partner Cory Venable.

Copper (-8.6% on the month) has tumbled with global sentiment, along with oil (WTI -9.6%) while gold is just flat (.55%).

The most sketchy credits have followed equities lower (as they normally do) with US Junk bonds (-1.19%) and high yield (-1.13%).  Investment grade corporate bonds are higher by a percent.

Traditional safe havens–government treasuries and the US dollar (vs. loonie)–have gained on bets that weakening demand and stock markets will prompt central bank rate cuts in 2019 (80% probability of US cuts now priced in).  Yesterday, Bank of Canada head Stephen Poloz said the BOC remains on hold, but with a tiny 1.2% 2019 GDP growth forecast, rate cuts loom likely in the second half of the year.

Acknowledging that the BOC is probably done hiking this cycle, Canada’s 10-year treasury price rose this month, and its yield has fallen from 1.73% on April 30 to 1.56 today.  This is back at the level it was just before the Trump election when tax cut promises drove dreams of inflation and a rising rate cycle that never came, (shown beside from Cory Venable).

Further warning of recession risk, some 40% of Canada’s treasury curve is already inverted (near-term rates above long), and the spread between 10 and 2 year yields has fallen to a cycle low of less than .049%; .156% in the US.

Many other countries already have negative spreads between their 30-year treasury and fed funds rate as shown below from Crescat Capital.  Similar inversions preceded the 2001 and 2008 recessions and bear markets.

It’s important to understand that in past cyclical downturns, once central banks started cutting policy rates, they did so several percent over many months before any ‘recovery’ launched.

This cycle–starting from just 1.75 and 2.5%–North American policy rates will be back near zero in no time.  The cavalry is running old playbooks but brings a fraction of its former force.  This means the battle may well run longer with more casualties than the past two downturns.  It’s wise for individuals to understand and take self-defensive measures accordingly.