The most hated bull market(s), this week


No. 1 chart of the week – central banks have bought and QE paid for $1 trillion of assets so far year to date.  Whatever research you look at that spins explanations for why things are so good and stock markets so resilient and support why you own what you own, never forget that magic money lens we all must look through.

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The Fed still talks 2 or 3 hikes this year even thought Atlanta Fed suggests Q1 GDP is melting  sub 1%.  With Fed talk of letting their balance sheet roll down, you’d think things were picking up not slowing down.  Debt market fundamentals must be healthy then, right?  Student loans, cracks in sub-prime auto finance and shuttering retail stores messing with commercial mortgage fundamentals, and these next charts from Morgan Stanley suggest maybe not.  MS debt to GDP-1.jpg

No day soon, central bankers might learn you don’t get out of a hole by digging, and you don’t get get out of a debt problem with more debt, even with magic money.  Unless things really do pick up, it doesn’t really seem like a market they are going to hike into.  Too easy, too long – now they slave to the beast they’ve created.

Trump complains there’s too must obsession over the first 100 days he promised everyone would obsess over.  Some sectors point to the high expectations of the crowded Trump trade are fading, even though stock markets remain ‘resilient’.  With the debt ceiling now threatening government shutdown, is the master negotiator thinking of using a shutdown as leverage to cut deals and set the table for his healthcare bill, tax cuts and infrastructure spending dreams for later this year?  Guess the answer to that is we’ll see.  Can’t help but think its all pipe dream and he gets minor and diluted wins at best.

No. 2 Chart of the week is beautifully self-explanatory,  explains chart 1, and explains central bank insanity.  It explains quite a lot actually, including Trump’s problem.  Fed explanations aside, this chart really does show interest rates and debt levels have a symbiotic relationship, regardless of concocted inflation calculations.

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So the Art of the Deal is this.  GDP is at 1%, the Fed is talking hikes and reducing balance sheet even though there are cracks in credit and Trump wants to increase spending and cut taxes…because that’s whats holding America back?  He can’t find $10B to pay for the wall he promised Mexico would pay for, while every 25 bp increase on current $20T debt is $50B.  America is going to need to wait longer than 100 days to get tired of winning.

Overseas, Japan still feels comfortable choosing QE over death.  But I did read about a 300mph train they are rolling out.  Now that’s a free ride.

In EU nothing new to report.  Death to Britain.  France has elections that threaten death to EU.  And German 2 yr bond yields continue at -0.80%.  The ECB can talk cutting back QE all they want, I still can’t figure out how they return negative interest rates to even 0% without creating a disaster.

Elsewhere, reportedly, Russia, Ukraine, North Korea, China, Syria, Turkey, Iran, Iraq, OPEC and armadas are all still there, any elevated market measure of risk is not.

Oh Canada

Speaking of being unable to raise interest rates anytime soon, the Bank of Canada is certainly not only handcuffed by record consumer debt, but also by the fact some key economic growth is being supported by very bubbly real estate.  Do we fight bubbles and hurt the economy and risk a leveraged consumer or keep supporting these bubbles and face the inevitable unintended consequences?  A perfect post credit-crisis example of why central banks shouldn’t commandeer the economic cycle.

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Half the country lives in red (no pun intended) rendering macro interest rate policy a regional challenge.

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With Toronto real estate markets well out of control, Ontario rolled out a 15% “non-resident speculation tax” similar to Vancouver’s.  It covers more geography and includes other steps such as cracking down on contract assignments, including condo-presales.  The effects remains to be seen but on the surface it is a tougher pass at their problem than Vancouver’s attempt.

Speaking of Vancouver’s attempt, while their tax may have redirected flow of money into their market and high-end prices may have cooled, what’s 100 people lined up for a 2 bedroom rental say about their market?

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Victoria is now talking about wanting a foreign buyers tax.  My wife is a realtor here and I can vouch firsthand for how strong the market is and how little inventory there is.  I can also say that while foreign money isn’t invisible here, a big recent local driver has actually been Vancouver buyers having cashed out there.

There are plenty of Seattle stories referring to new inflated demand from Chinese buyers after Vancouver imposed their tax.

The point being, and as I wrote last fall, China has seen the greatest credit driven expansion the world has ever known.  Some of that money understandably wants out.  Whether it be Canada or Australia or wherever, adding this demand to a low-rate easy credit environment creates more of the bubbly same elsewhere.  Immigration policy and lending standards might address the problem.  Regional taxes only seem to deflect it.

sc.pngIn that piece I also talked about how bubbly environments can bring out the nefarious and tend to crack around tops.  So after extended public scrutiny, and management shuffles and OSC inquiries, it seems lender Home Capital is started to seriously crack.  My experience is when funding markets start to pull away from a name, things can implode quickly.  Certainly one to watch as a broader market indicator.  Cockroach theory – there is never just one.

Finally BMO announced it was bundling $2 billion of uninsured mortgages into a trust for sale to investors, a first in Canada.  RBC suggests it is also looking into this market as well.  Traditionally mortgage backed paper in Canada are bundled insured loans.  In this yield starved world we may see demand and growth in this issuance.  On the one hand, some could suggest this represents a deepening of the Canadian mortgage markets, and a bullish sign for Canadian real estate.  Given where we are in consumer debt, prices levels and frenzied activity, if the Home Capitals of this world are a sign, maybe it suggests Canadian banks are thinking these are hot potatoes, “better on your balance sheet than mine.”  We’ll see.