The finger

BI POLAR

Workers in the US haven’t seen a real wage gain in twenty years.  Ditto for Canada and most of the industrialized world. Were it not for cheaper energy and almost-free money, consumer spending would slow to a dribble, eating jobs. Bad outcome, but it’s probably coming.

The same technology making us smart, connected and efficient also unemploys people. Look what autonomous driving will do – ten million lost jobs in the States alone, it’s estimated. We already know it’s cheaper to manufacture offshore, so that’s what companies do. The people who used to work there get the screws. The investors owning company stock get the divvies.

The fallout’s unmistakable. What this pathetic blog referenced yesterday – heaps more volatility in the wake of these changes – is the new normal. It’s true: the divide between the 1% and the 99% is yawning ever-larger. And this is behind things like Brexit, Trump and the Canadian middle class’s dangerous leveraged gamble.

Angry people feeling disenfranchised and disentitled lash out. So refugees and immigrants are blamed (Brexit). Or an entire religion or country (Trump). Or a racial group (Vancouver). Tying many people together in this wave of unhappiness is a feeling that the ‘elite’ – politicians, 1%ers, central bankers, CEOs and financiers – control the world and need someone to give them the finger.

You know the rest: nationalism, protectionism, protest votes, walls and barriers. Throw in the power of social media, and you have a heady brew of powerful dissent. The Occupy movement typified this, but it’s now morphed from a hashtag into a hurricane.

This scares financial markets. Investors hate surprises. They wanna make money. All the time.

So where are we now?

Here’s a quick update on the three big issues that face us.

First, Brexit. The markets surged Monday because (this time, at least) the anti-establishment forces are failing. Polling shows the UK will vote on Thursday to remain in the European economic union, avoiding messy, expensive consequences. Global equities popped. The US dollar (a safe haven) declined, so commodities went up. Gold plopped. The pound roared higher. Bond yields increased and prices fell.

The latest odds: a 70% chance Britain will stay.  The establishment, 1. Angry guys, O. Meanwhile a non-Brexit also increases the odds the US Fed will continue with its plans for rate increases in 2016, after Janet Yellen said as much last week.

SUCKS SIGN

Now, speaking of the States, on Monday Trump fired his campaign manager, Corey Lewandowski. Big move. The Donald, of course, is in the soup and cannot win the White House. So the markets kept going up. Trump troubles are investors’ joy, since is he not only weird and dangerous, but markets always do better with Dems in office.

Trump, as of Monday, trailed Clinton by 12 points. Worse for the guns-and-guts-anti-Muslim candidate, this comes after the terrorist rampage in Orlando by another nutjob fanatic ISIS sympathizer. That should have bolstered the Republican candidate’s fortunes, but did the opposite, based on a failed communications strategy. So, Corey’s head was served up on a platter. More to come, as Trump huddles with his team and his family trying to rescue his star. Pointless. He’s toast.

Finally, us. Canadians have rolled the dice big-time on a single asset, in large part because they don’t trust financial markets and want an easy way to catapult over middle class stagnation to wealth. This blog has already served up a few million boring words on how this will not end well overall, since the strategy is mostly based on debt and leverage. But it also has the capacity to blow out the economy at large.

Moody’s, the US-based ratings and research guys, this week says if house prices in Canuckistan fall 35% (as they did in the US – which would take us back to only late 2014 pricing in YVR), the Big Six banks would lose $12 billion and CMHC be hit with a $6 billion loss.

There are 260,000 bank employees in Canada, so imagine what the impact of that would be. It would wipe out more than 100% of CMHC revenues and force taxpayers to pony up roughly $2 billion to keep the agency afloat. And surmise what such an event would do to the dollar, plus the cost of imports and the resulting surge in inflation. Everybody, in other words, would get poorer.

Says Moody’s: “Highly indebted consumers are more sensitive to employment or interest rate shocks, either of which could increase mortgage delinquency rates. At the same time, overvaluation concerns raise uncertainty around collateral values, and litigation and/or a government risk-transfer reversal could lead to further unexpected loss at Canadian banks.”

Some people think our housing markets will rise forever. But then, lots of folks believe Trump will win or Britain revolt. The odds are probably 100% that none will occur. Equally likely: the wealth gap will continue to widen, fueling social unrest and birthing more leaders who promise simple solutions.

So, you can moan and gamble on a fading one-asset strategy, or you can see what’s coming and react.

More on this soon.

Exit

DAD

If you hate volatility, stay at the cottage for the next month. Unplug. Be like Trudeau. Buy a canoe. Learn to vape. Get a tat. Smoke something you find in the woods. Just don’t watch BNN, CNN or read this blog. Please. I implore you.

First, there’s Brexit. On Thursday UK voters decide to stay or leave the European economic union. A no-brainer, ya’d think. Leaving will cost a ton of jobs, put Britain on a path to recession, whack financial markets and imperil, oh, 700 million or so people. But this has been largely turned into a referendum on immigration by the right-wingers and nationalists, who argue open EU borders let too many of those dangerous brown people in.

Doubt it? Look at the poster unveiled last week by the UKIP (the knuckle-dragger opposition and ‘Leave’ leaders), called ‘Breaking Point’. White supremacists everywhere would love it, with that  horde of sinister refugees streaming in. This, said the ‘Remain’ forces, has “echoes of literature used in the 1930s.” And it does. Human nature hasn’t changed. We still suck.

BREXIT POSTER

But since the murder last week of MP Jo Cox, the tide seems to be turning. The first poll since the event showed ‘Remain’ pulling ahead of ‘Leave’ after three weeks of opposite momentum. Bookies say the probability of a negative vote has declined to just 30% from 40% last week, so if you put your money on the status quo, you have a 70% chance of winning.

And that’s that. But the trip from here to next weekend will not be smooth. Already we’ve seen a flight to safety swell bond prices and crush yields (they temporarily went negative – minus .038% – in Germany). That’s impacted the ECB’s giant stimulative bond-buying program ($90 billion a month) and sent $1.25 trillion in bonds lower than the deposit rate. Meanwhile European inflation has been at 0% or less for ten of the last 18 months. Deflation. And a Brexit would make it way worse. Quelle mess.

But, if you believe the oddmakers (and common sense), it won’t happen. Thus, expect further violence.

TRUMP

Now, there’s more. The Republican National Convention to nominate Donald Trump opens July 18th, nine days before the Fed makes its next interest rate announcement. Since he demolished his opponents, fair and certainly square, he’ll be crowned. But the Visigoths know The Donald will destroy their party for at least the next one or two election cycles, and represents the same unfortunate side of humanity as do the Brexit bumpkins.

As the UK ‘leave’ forces will flame out, so will Trump. He can’t win, thanks to the Electoral College and his embrace of the politics of division. But he will roil markets, negatively influence the national agenda, become a massive distraction and might even turn the RNC event in poor Cleveland into a street slugfest.

Meanwhile the American economy’s been in a cooling phase, with lower job creation numbers that made the Fed end its flirtation with a June rate hike. As Brexit stomps Euro bond yields, US debt prices have also been rising – part of a global flight to safety. It’s not over yet.

TRUDEAU

And, lastly, we have the gang in Ottawa who now have another problem to deal with – lower mortgage rates. A three-year variable is at 2%, and fiver-fixed rates range from 2.32% (at Ahmed’s Samosa & Home Loans Emporium) to 2.49% at all of the big banks. Combined with dire words of warning in the last few days, we’re obviously getting closer to direct federal government intervention.

Says Capital economics chief North American economist Paul Ashworth: “This is a bubble. A very big bubble. And it is going to end in tears. The Bank (of Canada) claim that the risk of a housing downturn is small because there is little risk of either a spike in the unemployment rate or a jump in long-term interest rate risk premiums is naïve in the extreme.”

Says TD: “The party will come to an end. Markets are ripe for a correction.”

Says RBC economist Robert Hogue: “With affordability, or rather unaffordability, having moved off the scale in the past three to four years, the historically volatile Vancouver-area market is undoubtedly under substantial stress. It is vulnerable to a marked correction.”

Says T2: “This is a very significant crisis…“We’re on a trajectory that doesn’t have any good outcomes. What we’re all hoping for is to stabilize the market… We need to make sure we’re reining things back a little bit, in a way that doesn’t completely devalue those people whose retirements and whose equity is still in their homes.”

And we just heard that 90% of all detached houses in Vancouver are “worth” more than $1 million. At least for a while.

Dude. Pass the paddle. And the bong.