Juggling Dynamite

The loonie has rebounded 2.7% against the greenback so far in April, leading some to predict that another up-cycle for commodities, Canadian equities and the C$ has begun. But, the loonie has climbed with oil prices in 8 of the last 10 Aprils, only to retrace again in the month thereafter.

The larger perspective, as shown in the below chart since 1994, from my partner Cory Venable, is that late in economic cycles when growth and revenues disappoint, the US dollar typically rallies, while oil and commodity-centric currencies weaken.

Not only is the global benchmark currency a relatively deep and liquid ‘safe haven’ in times of global financial strain, but the bulk of global debt (some $237 trillion today) is owed in US dollars.  As US spending and imports fall, so does the inflow of US dollars to foreign exporters who need greenbacks to make their payments.  This naturally prods them to buy more US dollars, and traders pile on for the ride.  These factors compound rising U$ costs and shrinking free cash flow for foreign borrowers and exporters.

As noted below, the U$ does not typically top out against the C$ until the equity market ‘risk-off’ cycle has bottomed.

Despite 2018 seeing a negative first quarter for stock markets, declines have been modest thus far.  And unlike the last two, this contraction cycle has the added distinction for Canada of boasting some of the most over-valued realty and indebted households in the world, going in.

We suspect that the loonie is unlikely to have fathomed a durable cycle bottom just yet.

Overnight there is news that German prosecutors conducted a large-scale raid on several premises of Volkswagen’s sports car maker Porsche, as part of an investigation connected to the diesel-emission scandal.

While reports say that authorities are probing three employees of the luxury car maker on suspicion of fraud and false advertising, the truth is that collusion and perpetration of this fraud was endorsed from top corporate executives and European governments themselves.  And we, trusting (naive) customers and air-breathers on earth, are all victims.

If you have not yet watched the deisel-gate expose by Netflix’s new series Dirty Money, you should.  It is episode one.  And it should make you mad.

From the creators of Enron and Going Clear comes an all-new Netflix Original Documentary Series exposing the greed, corruption, and crime spreading through our global economy. Here is a direct video link.

It’s important to understand that yield curve inversion and bear markets typically begin 9 to 12 months before any recession is officially proclaimed in backward looking data.  Here is my partner Cory Venable’s chart showing the inversion points in the past two cycles, and where we are today.

In the last cycle, the US yield curve inverted in early 2007 as the US housing market decline was already underway.  The S&P 500 peaked in October of that year, but it was not until 13 months later on December 1, 2008 that NBER and mainstream commentators declared that a recession had begun in December of 2007. By the time of that announcement, the stock and corporate bond market had already fallen 47% and pundits were insisting, as usual, that no one could have seen the losses coming.  Moves in the yield curve offer a valuable heads up for risk management.

Bloomberg has a habit of posting just a 2 or 3 minute clip of full guest interviews, which often miss the meat of the matter.  Komal Sri-Kumar had many relevant observations this morning in his hour long appearance. In this 3 minute clip that was posted, he discusses how the 10 and 2 year treasury yield curve is moving toward zero, and how one more Fed hike (on May 2nd?) could be enough to invert the curve.

Komal Sri-Kumar, president and founder at Sri-Kumar Global Strategies, discusses Federal Reserve policy and recessionary warnings from the flattening yield curve.

Here is a direct video link.