Juggling Dynamite

Those saying that the recent rise in interest rates is still inconsequential because relative rates remain below historic averages, are ignoring that debt service costs are a function of rate and the amount of debt outstanding.  With record debt at every level in pretty much every country today–consumers, corporations and governments–every rise in rates equates to a significant increase in debt service costs and less discretionary cash flows for other spending, saving and investment.

Pretending otherwise is whistling past economic graveyards.  The chart beside shows the 47% increase in just US consumer credit over the last decade.  Doug Kass explains this math below.

Doug Kass, president and founder of Seabreeze Partners, discusses a “new regime of market volatility” and the impact of the rising 10-year yield. Here is a direct video link.

When markets come down, banks will look for bailouts and main street will be expected to foot the bill.

From @RanaForoohar: “We all know something is deeply broken in our economy. It’s been eight years since the financial crisis. The Fed has pumped $4 trillion of money into the markets, but we are still in the longest, slowest recovery of the post‑war era.” https://t.co/KR7PSkGil9 pic.twitter.com/YoImiLfClU

— Evonomics (@EvonomicsMag) May 16, 2018

Canadian average home prices doubled over the past decade (as shown in the chart below) as cheap credit and lax lending flowed.  But over the past year, the supply of buyers has been retreating amid unaffordable prices and rising finance costs, even if sellers refuse to lower prices, for now.  Listing agents are complaining about ‘unrealistic’ sellers and owners are complaining about their agents.  This is a late cycle hallmark.  One thing for sure, if prices won’t bounce, motivated sellers will start lowering list prices, others will be forced to follow–and so it goes.  An aging population with the bulk of their life savings in expensive-to-own-and-maintain-homes, needing to raise cash for retirement, does not have the upper hand here.  See:  Refuse to sell your house at these prices?  Join the growing club:

“Many Canadians don’t like the prices their homes will fetch, refusing to test the waters in this weakening market.
The latest numbers from the Canadian Real Estate Association show new listings across the country fell 4.8 per cent in April from March, on a seasonally-adjusted basis.
That, said Bank of Montreal chief economist Douglas Porter, shows “potential sellers are unimpressed with the prices on offer.”