Canadians have been refinancing to delay bankruptcy

The number of Canadians filing for either a consumer proposal or bankruptcy that owned a home fell to just 7% at the end of May 2017 from an all-time high of 35% in February 2011.  This might sound like good news, but not when we look under the headline.  Credit is the most important cycle and the debt expansion this time has continued much longer than most.  Canadians were already highly-indebted by 2011, but rapidly rising home prices the past couple of years have allowed them to sustain the unsustainable a while longer through refinancing and second mortgages. This has left them (and the banks) even more financially fragile and vulnerable as we stare into the next cyclical downturn in the global economy.  See Canadians are using second mortgages to avoid [Delay] bankruptcy:

Hoyes Michalos has a very simple explanation for that, Canadians are using their homes like ATMs, withdrawing equity. “Homeowners with significant unsecured debt are currently able to refinance this debt through a second mortgage or home equity line of credit (HELOC)” claims Hoyes Michalos. There’s 1.91 million Canadians with HELOCs, and even more with a second mortgage. Not exactly signs of booming incomes that would be the ideal reason to see delinquencies decline.

They warn that any softening of the market that results in a correction of home values will result in a sudden spike in homeowners filing for insolvency. They go on to warn if this combines with “even a modest rise in interest rates…we could see this index rise above levels experienced after the 2009 recession.”

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Some observations on the ‘coming crash’

Legendary investor Jim Rogers sat down with Business Insider CEO Henry Blodget on this week’s episode of The Bottom Line. Rogers predicts a market crash in the next few years. One that he says will rival anything he has seen in his lifetime.  Here is a direct video link.

A few ironies and observations stand out as we watch this clip.

First, is its sponsored by long-always behemoth Fidelity whose business model depends on people buying and holding their products in order to collect fees.  As you watch the clip, consider how ‘the worst market collapse’ of our lifetimes will impact their customers and revenues, indeed their ability to sponsor sites like Business Insider in the future, if Rogers is correct about the coming mean reversion cycle.

Second, Henry Blodget (age 51) is the infamous former equity research analyst who was senior Internet analyst for CIBC Oppenheimer and the head of the global Internet research team at Merrill Lynch during the dot-com bubble. Due to violations of securities laws including knowingly recommending junk stocks to the public and a civil trial conviction after the 2000 -50%+ collapse, Blodget was permanently banned from involvement in the securities industry. He then became a host of finance show Yahoo’s Daily Ticker.  I met him as a guest on that show in May 2009 in New York when I was then a very rare bull and he and most people were existentially gutted by the second -50%+ market collapse of 2007-2009.  Out of these ashes, Henry co-founded and built the business news aggregator site Business Insider, which was then 88% sold in September 2015 for a reported $343 million.

Trained as a fundamental analyst, and having lived a boom, bust, boom, bust, boom career that has so far spanned two of the worst loss cycles in market history, Blodget has been understandably cautious and expressing concern as asset prices have rallied far beyond reason once more on QE-phoria the past 4 years.   In this discussion the much older Jim Rogers (74), explains that following the present largest asset bubble ever in history, we should next expect the largest price collapse ever to follow.  Makes sense, but anxiety provoking to those who still have no strategy to protect or profit from the coming reset.

Rogers is reportedly a billionaire, having run the Quantum Fund with George Soros from 1973-1980.  People with savings have to put our funds somewhere, and Soros has more than most.  He says he has bought emerging market stocks and bonds as a place to park some of his capital, although he does not define his allocation percentage.  He explains that valuations there are much lower than other developed markets today, so he sees it as a relatively less risky bet than things like US stocks.

While there is no doubt that US stocks and corporate bonds are among the most obscenely valued today, the trouble is that when they enter their must deserved bear market, international capital flows and deleveraging will take emerging markets down for the ride as well.  In a world of highly correlated central bank policies and markets, international diversification is a theory, but not reality.

As Harry Markowitz pointed out in his 1952 paper that fathered modern portfolio theory, the most defining feature of portfolio returns is our asset allocation decisions.  Where risk assets are highly correlated and over-valued across global markets, holding different colors and packages of them does not add diversity benefit and will not meaningfully reduce capital risk and losses once bear markets begin.  Only the rare, non-correlated asset classes that maintain liquidity–like cash, some currencies, and the least risky bonds and deposits–can do that.  And yet, because these are least-yielding and least-fee-paying assets to ‘advisors’ in the short-run, few people are prepared to hold them while they wait for riskier assets to go back on sale.  This is the Achilles’ heel of managers and investors every single cycle, and this one will be no different.

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Jeff Sachs Global Solutions speech

Many of the solutions to big global problems today are obvious and attainable thanks to leaping technological advancement. The harder part is getting policies and people moving in the smart, sustainable direction.

Jeffrey Sachs (Director, Center for Sustainable Development, Columbia University) at the T20 Summit GLOBAL SOLUTIONS on May 30 in Berlin.  Here is a direct video link.

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