Juggling Dynamite

At 1.1%, the Canadian savings rate is today near all-time lows, while Canadian debt is at all-time highs, and unemployment is set to move higher. Years of reckless financial policies have driven Canada to the point of hard return.  This one is gonna hurt.

As observed by Canadian consumer credit expert Scott Terrio this morning:

No savings. Nothing to absorb any kind of financial shock – job loss, reduced hours, separation/divorce, illness, selloviction/renoviction, etc. It’s been my theory for while now from what I see every day at work – there is a whole segment of people living on the financial edge.

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A recent print interview with credit analyst Jim Grant is worth reading, see The world-wide suppression of interest rates has been something very near a crime.  Couldn’t agree more, to wit:

“…the suppression of interest rates has served to advantage one class of people: The savers have been disadvantaged whereas big banks have been very greatly advantaged, and the financial community has been advantaged. In short: the saver’s loss has been the speculators’ gain. So, the ordinary working person has been disadvantaged and that is apolitical. To speak metaphorically but, I still think truthfully, that kind of policy is bordering on criminal – and I stand by that.

Now the Fed wants to pause raising interest rates at least until 2020. And the Trump administration even demands a rate cut of 50 basis points. What does it mean when, nearly a decade after the end of the recession, the US economy can’t stand short term interest rates of more than 2,5%?”

When asked what he would advise the US Federal Reserve today, Grant is characteristically articulate:

“I fear it might be too late, but to start with, I’m in favor of interest rates which are discovered in the marketplace. And, at the very short end, interest rates ought to be pitched at a level that provides some premium to the inflation rate. So, my first order would be to give a speech saying that we are out of the business of manipulating expectations; we are out of the business of manipulating the stock market. The stock market is going where it wants to go, and if it goes down a lot, so be it. That’s not our line of work. We are in the business of securing a currency which holds its value and which provides a good medium of exchange.”

A new week and more data suggesting that the credit-driven consumption peak is behind us this cycle, see Malls see a tsunami of store-closures as foot-traffic declines.

While deep discounting brought some resurgence of shoppers into 2018, merchandisers selling at a loss cannot continue forever.  Already, year to date in 2019, there have been nearly 6,000 US store closures announced — more than all of 2018–and some 12,000 are estimated by year end.  Here’s the chart showing the relapse in US mall traffic since the summer of 2018, despite the efforts to attract it through ‘experience’ stores.

The rising supply of space is forcing mall owners to renegotiate lower rents for existing tenants.   A cleansing period is necessary after the debt-rush of the last decade, but we should be under no delusions here, the consolidation and write-downs needed will be a multi-year process.  And the strain on levered investors like REITs and other commercial landlords and lenders will intensify while driving a cascade of job losses through the overall economy.

We must never forget that multi-year lows in unemployment claims are a hallmark of cycle tops, not bottoms (US unemployment since 1968 shown below).

Once layoffs accelerate as they are doing now, knock-on effects will weaken consumption ability further.  Highly indebted consumers, companies and investors are ill-prepared for the weakeness now spreading.  The question is:  are you?