Juggling Dynamite

Indebted households have reduced spending and saving ability for the years it takes them to pay off debt. Today Canadians owe a record $1.71 of debt for every $1.00 of disposable income.  This suggests an extended period of lower consumption ahead, even if interest rates did not rise further from here.

On top of massive mortgages and lines of credit, Canadians are also servicing record auto debt stretched over the longest repayment periods in history. More than half of all new car loans are currently financed for 84 months (7 years) or longer, compared with an industry standard that used to be 60 months (5 years).  J.D. Power numbers suggest that more than 30% of Canadians who trade in a car today have negative equity–owe more on the car than it’s worth.  This will make it more difficult to afford repairs and replacement vehicles over the next few years.  Creative financing allowed the car industry to bring forward future vehicle sales and book them in the present.  It also detracted from future sales.

Canadians are buying more vehicles than ever. With most borrowing money in order to make this purchase, Jacqueline Hansen reports that longer and longer car loans are the new normal.  Here is a direct video link.

Many important steps that we need to take are discussed in this segment.  It is up to individuals to act.  The plague of plastic and our throw-away habits are harming all of us.

Dr. Jonathan Latham says 95% of table salt contains plastic due to plastics pollution in the oceans.    Here is a direct video link.

Reaching for marginally more yield in corporate debt and equities, while taking on much higher capital risk, is dumb money management.  And yet, it continues to be the consensus financial recommendation.

Today, because BAA-corporate bonds have been indiscriminately bought at high prices, their yield spread or net income benefit compared with much more liquid and secure, US 10-year government treasuries. is less than 1.9%.  As shown in the chart below, this yield spread is the lowest it has been since 2006 when it fell to a foreboding 1.6% .  That was just before the Great Recession spiked defaults and cut the market price of corporate securities in half.  See:  Will corporate debt cause the next recession.

Rather than pay down debt and build up savings during the extended boom of the last decade, every level of the economy–governments, corporations and households have done the opposite–expanding debt and leverage while dwindling cash reserves.  This makes the majority ill-prepared for the coming downturn in the economy, financial and realty markets.

It also means the buying opportunity ahead, for the few who have gone against the consensus and prepared themselves to be counter-cyclical, is likely to be larger this time than historically average.   This video clip touches on some of this further.

DoubleLine chief executive Jeffrey Gundlach explains why he is cautious on corporate bonds, the dangers of an expanding deficit and what the next recession might bring.  Here is a direct audio link

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