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.
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.