Juggling Dynamite

The thing about economic expansions is that people are supposed to work, pay down debt and build up savings, so that they can ride out the economic downturn that follows.

Canadians have done the opposite over the past 8 years, and now approach 2018 with the highest debt and lowest cash savings in decades.  A recent Ipsos poll, conducted on behalf of MNP, confirms some grim facts:

• • • • • 40% of respondents fear ending up in financial trouble if rates go up much higher, with 1/3rd already feeling the impact of higher rates and nearly half of households don’t feel financially prepared for further interest rate increases.
        • 42% of respondents said they don’t think they can cover basic expenses over the next year without going deeper into more debt.
        • The same number said they’re already within $200 of not being able to cover monthly expenses. Here is a direct link to a video report.

Bottom line: even if the Bank of Canada were to stay pat, or move to cutting rates again in the new year, Canadians are tapped out in terms of commitments that their income can service.  As shown in the latest weak retail sales report for August, they have already begun pulling in spending pretty much across the board, even while still at a cyclical low in unemployment.

Canadian households, the economy and government budgets are woefully unprepared for the payback period now ahead.

Danielle was a guest with Jim Goddard on This Week in Money, talking about recent developments in the markets and world economy.  You can listen to an audio clip of the segment here.

Taleb offers some good first-hand historical perspective in this discussion, also some key points to understanding the genesis of our current free market-free mess.

The Black Monday crash was 30 years ago this week. “Black Swan” author Nassim Taleb was a trader for First Boston at the time. He made a lot of money while others lost fortunes. He recounts the experience with Bloomberg’s Erik Schatzker.  Here is a direct video link.

Also see The New Yorker: Waiting for the “Trump Slump” in the stock market:

The Federal Reserve is tightening monetary policy at a time when stocks are trading at valuations well above their historical averages. Looking back, this combination of circumstances has often proved disastrous for stocks. The stock-market crashes of 1929, 1987, and 2000 all came at moments when the Fed was raising interest rates and valuations were elevated.

Of those three crashes, the one on Black Monday may well be the most pertinent. In the autumn of 1987, as today, the economy appeared pretty healthy. Profits and payrolls were rising, and the stock market was on a tear. In the first nine months of the year, the Dow rose by more than forty per cent. But, even though prices had risen to very high levels relative to earnings and accounting values, they weren’t quite high enough for investors to agree that a bubble had inflated. (In October, 1987, the price-to-earnings index of companies in the S. & P. 500 index was about twenty-three; today, it is about twenty-five.) And, apart from Elaine Garzarelli, a stock analyst at Shearson Lehman, virtually nobody predicted a big sell-off.