Because this blog weirdly attracts doomers and hair-shirters, those who gleefully talk of American collapse, market mayhem, financial crisis and things almost as worrisome as Adele, Costco, Justin Bieber or even Kias, we’re always on the lookout for Black Swan events. Whazzat? It’s something that deviates beyond what’s normally expected of a situation and is therefore extremely difficult to predict. Author Nick Taleb made BS events famous.
Used to be that terrorist attacks, earthquakes, severe climate change, negative interest rates or regional wars might qualify. But they’re all mundane now. Even when UK voters lost their collective minds and voted to leave the European Union, it was no Black Swan. Hardly a grey gosling.
So what really keeps economists up at night? What perversely deviant thing can happen that no sane person ever anticipated?
You bet. President Trump.
The fact Donald Trump is the official Republican nominee for a Presidential election now just eleven weeks away is astonishing. His crushing of experienced, articulate, thoughtful rivals like Jeb Bush and Marco Rubio was decisive and overwhelming. Today his rallies continue to be packed, emotional love-ins with a billionaire who arrives on his own passenger jet and has systematically insulted everyone. Except angry white guys.
Trump is a political phenom. His success comes from an adroit use of social media, and the careful cultivation of his image as a political outsider. He also has money, TV fame, a hot wife, buckets of name recognition and an outsized ego – major qualifications for political success. These things, so far, have overshadowed the vacuity of his positions, the flip-flopping on policy, the racism, xenophobia, protectionism, isolationism and blind patriotism he epitomizes. The trouble is, millions of people love that. They want it. More of it.
So to economists, financial markets and money guys, Trump embodies what the system fears. He stands for a breakdown of what’s evolved, wherein globalization’s made corporations more efficient, central bankers have smoothed over economic burps, high-speed trading has taken over from humans, wherein savers get nothing, the middle class has been exported to China and India and the wealth gap has canyoned as never before. Ironically, it’s a billionaire dude who has profited from all of those evolutions that is now Everyman’s champion.
Trump is the US equivalent of Brexit, of the French war on Birkinis and the rise of the right in Germany. He is the antithesis of T2. Trump’s war on Muslims, his wall to keep Mexicans in their place and his desire to bomb Syrians and others back to the bronze age is seen as populism gone bonkers. Middle-class voters angry about job loss, stagnant incomes and an economic recovery which never really came after the housing collapse want something and someone to blame. Trump gives them multiple targets. ‘Make America Great Again’ is code for going backwards in time. Exactly what so many crave.
So here’s the bad news from the bright minds at Citigroup. If Trump wins over Hillary Clinton (what a choice…) financial markets could devolve into chaos and the world would probably tip into recession.
“A Trump victory in particular could prolong and perhaps exacerbate policy uncertainty and deliver a shock (though perhaps short-lived) to financial markets. Tightening financial conditions and further rises in uncertainty could trigger a significant slowdown in U.S., but also global growth.”
The estimate is the global economic expansion – crawling along now at less than 2% – would shed up to .8% because of Trump, pushing the world back into a recession that central banks have spent trillions trying to avoid.
Bad news for Canada, which is already struggling with rising unemployment, negative growth and wobbly real estate markets – which now account for about 20% of GDP. Our country lives on trade. And Donald Trump has said repeatedly he would rip up the North American Free Trade Agreement, under which 80% of the stuff we make finds its way onto US markets.
“I like free trade, but free trade is not free trade, it’s dump trade because we lose with China, we lose with Mexico, we lose with Japan and Vietnam and every single country that we deal with. We lose with Canada — big-league. Tremendous, tremendous trade deficits with Canada.”
Trump (and Clinton) would also rip up the Trans Pacific Partnership, which Canada is enthusiastically endorsing (and has signed) since it gives greater access to Asian markets. Meanwhile Trump has made no bones of his utter distrust and suspicion of Syrian refugees, who were welcomed here with open arms by the federal government, promising to ‘harden’ the border against potential terrorist incursions from the north.
It’s interesting so many people coming to this blog loudly support a guy who has the clear ability to turn order into chaos, make money flee, and rewind Canada. More evidence of the broad-based appeal a simple man in complex times can muster.
Sure, the bank risk management dudette told analysts this week, we could withstand a 30% crash in Canadian residential real estate. It would cost the bank only $100 million or so in mortgage loan losses. Zzzz.
And that’s what she actually stated (more or less) during the call CIBC had with Bay Streeters in conjunction with releasing its quarterly results (up 9%, to $1.14 billion over three months). As you may have heard, all the big guys are coming in with robust profits despite misery in the energy sector, a contracting economy and serious concerns about a rupture in our housing gasbag.
These bankers have also been stress-testing in anticipation of a US-style Houseageddon, were one to start in Vancouver, spread through BC, decimate Calgary, then infect the Golden Horseshoe before laying siege to the GTA. The answer so far: piece of cake. Staff might be laid off, mortgage operations docked and common share values pared, but no bank would stumble or fall, no matter how bloody housing markets became.
That’s probably a fair assessment. Even in the depths of the 2008-9 credit crisis, with the financial system facing a 1930s-style challenge and bank shares losing about half their value, none of them came remotely close to insolvency, and nobody cut a dividend.
But that sure doesn’t stop the fear-mongering, disinformation and potty-mouthed hyperbole that seems to be heating up as the real estate market cools down. Once again there are cries that banks are vulnerable, and if one of them rolled over as real estate croaks, your bank accounts, GICs and mutual funds would be wiped out. And it’s all Trudeau’s fault.
Now, this pathetic blog may not be a weed-smoking, tattooed, selfie supporter of T2, but it does like the truth. And right now some people on the fringes of Conservativism need a cuff on the head. Like Charles McVety.
Chuck is an evangelical mail-order reverend, who mattered a lot when Stephen Harper was in power. He was a best bud with the dearly-departed elfin deity F, who served for years as the nation’s finance minister. Besides being an anti-gay crusader, McVety was also enlisted by his prime ministerial friend to assist in my ouster from the Conservative caucus in Ottawa after I irritated the boss with my blogging and bad attitude. In fact McVety mounted a challenge in my own riding to have me unseated as MP, and used my heretic words to raise millions from fundamentalist supporters who came to believe I had horns and a tail. (The horns part is totally false.)
Anyway, the Rev and I go way back, even debated on TV. I survived. None of this would be relevant to a financial blog about canines and hormones were it not for the fact McVety has now taken up the torch against bank bail-ins – like the other Con gadfly Ezra Levant did several months ago. They’re spreading the myth that T2’s first budget snuck in rules allowing a failing bank to seize depositors’ money and convert it into stock, of dubious value. It’s a harkening back to the fiasco in Cyprus, where major depositors found their assets converted into bank equity when that little country faced a liquidity and confidence crisis.
Anyway, the Rev can explain it all better in this scary vid he’s using to raise more money from the sheeple congregation:
I hate to revisit this issue again, but apparently have to. There will be no confiscation of deposits or accounts if a major ‘systemically-important’ bank fails (which will never happen). Depositors are not bank creditors. Nobody can seize assets to shore up a financial institution. This was not a Liberal idea. It came from the Conservatives, first introduced in F’s 2013 budget.
Let’s revisit what Flaherty said in that document:
“The Government proposes to implement a ‘bail-in’ regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are too big to fail.”
Here’s what the maiden Trudeau budget said:
“To protect Canadian taxpayers in the unlikely event of a large bank failure, the Government is proposing to implement a bail-in regime that would reinforce that bank shareholders and creditors are responsible for the bank’s risks—not taxpayers. This would allow authorities to convert eligible long-term debt of a failing systemically important bank into common shares to recapitalize the bank and allow it to remain open and operating. Such a measure is in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as “too-big-to-fail”.
Hear an echo? It’s exactly the same government intention, framed in nearly-identical language. There’s nothing ‘Liberal’ about this. The Trudeau gang just copied it from the Cons – something Tory spear-carriers like McVety and Levant should know (and do).
Now, would a bail-in regime take your money?
Of course not. Here again are the actual proposals, detailed in a Department of Finance paper on the initiative (called the ‘Taxpayer Protection and Bank Recapitalization Regime’).
The creation of new long-term senior bank debt – so-called ‘bail-in bonds’ which investors would snap up (since they pay a premium for slightly enhanced risk)
Conversion of those bonds into bank equity under certain strict conditions when bank capital requirements were not met
Cancellation of some or all pre-existing bank shares in the event of a bail-in occurrence
Deposits would be excluded from the bail-in regime.
Systemically-important banks would be subject to higher ‘loss absorbency’ requirements, based on risk assessments.
Naturally, there’ll be no deposit-sucking bail-in. The country’s Big Six banks are rolling in dough, churning out ever-higher profits and constantly trimming risk. The results being announced this week – even as Vancouver real estate self-combusts – proof how ludicrous the notion is.
Still, it’s 2016. There are people who actually believe what they read online or watch on YouTube. Always near at hand, sniffing opportunity, are those using a public pulpit to scare and fleece the masses. I thought Charles McVety could stoop no lower. But then I always underestimated the man.
The views expressed are those of the author, Garth Turner, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.