Juggling Dynamite

David Rosenberg can be helpful because he is one of the few economists who looks for negative trends in the data rather than just blue skies and sunshine.  His comments on the implications of a ‘Powell pause’ in this clip are lucid.  Here is a direct video link.

This ‘elephant in the room’ could send stocks into a tailspin, Wall Street bear David Rosenberg warns from CNBC.

Incongruent, however, is that while warning of late cycle recession risks and a housing downturn in Canada, Rosenberg was suggesting people move capital into Canadian stocks this month.  True, Canadian equities are trading at cheaper valuations than US stocks today, but they are still near cycle highs, and stocks are stocks–they pretty much all tank in recessions and bear markets.  ‘Defensive’ they are not.

Even in 2001, when Canada did not officially follow the US into recession, the Canadian stock market still lost half of its value along with US markets.  A similar magnitude of losses happened in 2008, even though Canadian realty was then much less levered and more stable than US housing.  Of course, that was then, today Canada is worse off.

Rosenberg’s firm Gluskin Sheff,  a Canadian-based asset manager, may expect their chief economist to talk in support of their Canadian equity holdings.  This would be unfortunate because Gluskin hired Rosenberg to come and help rehabilitate their risk-management image after their portfolio losses in the 2008 cycle.  Given that Gluskin’s own share price (GS.TO) has fallen 50% since 2014 and 35% since just July, it seems the firm is under pressure once more.  Unfortunately, remaining long and adding to Canadian equity positions, heading into a recession, is unlikely to help them or their clients.  But since most asset management firms are paid the highest fees from equity allocations, this tends to be a constant mantra.

Further on cycle point this morning, US initial claims for jobless benefits moved higher.  As shown in my partner Cory Venable’s chart below since 1965, when initial claims start rising from extreme lows, recessions (grey bars) have historically been imminent.

Another day another urgent warning on climate catastrophe, this time from the UN, see World must triple efforts or face catastrophic climate change:

“New taxes on fossil fuels, investment in clean technology and much stronger government policies to bring down emissions are likely to be necessary. Governments must also stop subsidising fossil fuels, directly and indirectly, the UN said.

Gunnar Luderer, one of the authors of the UN report and senior scientist at the Potsdam Institute for Climate Impact Research in Germany, said: “There is still a tremendous gap between words and deeds, between the targets agreed by governments and the measures to achieve these goals.

“Only a rapid turnaround here can help. Emissions must be reduced by a quarter by 2030 [to keep warming to no more than 2C (3.6F) above pre-industrial levels] and for 1.5C emissions would have to be halved.”

Business–as–usual is the road to economic ruin.  Meanwhile a growing wave of lawsuits for damages caused will continue to plague the companies, leaders and individuals who perpetrate and enable the status quo.  Who of us is making active steps and daily choices now to lead the change needed?

We have been noting all year, that central banks were unlikely to hike their policy rates as hoped because economic weakness in the highly indebted global economy would cause them to pause, and then return to another round of accommodative experiments.

As I wrote here last week in Nearing the Pause that Won’t Refresh? every business cycle central banks optimistically hike rates with the stated goal of slowing the economy enough to prevent it from overheating and not so much as to trigger a recession.

And even though they have failed in this goal 12 of the last 13 tightening cycles, with a recession and bear market following all but one in the mid-1990s, hope springs eternal.  This chart shows the rate-hiking pause that preceded the last two recessions in 2001 and 2008 (grey bars).

It is typical for stocks to respond to pause news with initial jubilation, even while government treasuries are bid, and oil makes a 2018 low today. Only the latter two are admitting the vector of growth here. In a co-dependent dance, the more stocks rally at this point, the more likely the Fed will see room to hike further and therein lies the crimp of debt burdens amid falling cash flows.

After the initial surge of exuberance comes a revelation that central banks are eyeing a pause because profit margins are shrinking and the economy and market cycle have already rolled over.  If history holds, next comes a reality phase, when the cash crunch intensifies among highly levered participants, and asset liquidation resumes with full vigour.