Hilliard’s Weekend Notebook
Thoughts, views and opinions as current events unfold: With topics taken from current market events and my recently released book — When the Bubble Bursts: Surviving the Canadian Real Estate Crash (Dundurn: March 2015) and my first book Investment Traps and How to Avoid Them (1999) — this short piece will give you unique and valuable insights filtered by my thirty-six years’ experience as an investment professional.
Weekend Notes - Page 1
Flaws of Neoliberalism are showing --- November 17, 2017
Neoliberalism, a political and economic ideology, has guided most economic policies in the developed world for the past four decades.
There is very little discussion or mention of this term in the media.
Evidence is building that neoliberalism is flawed in both economic and political terms. Obvious examples of economic flaws are the housing and private sector debt bubbles afflicting advanced market economies like Australia and Canada.
Has the dominance of neoliberalism in the corridors of power run its course?
The retail industry is in big trouble --- November 10, 2017
Retail spending per square foot at American malls has been in decline for years. Reports of store closings by large retail chains like J.C. Penney, Walmart, Sears, Kmart and Macy’s are almost a weekly occurrence. Smaller chains disappear at an alarming rate.
Are these signs of a complete meltdown in the business model of bricks-and-mortar retail?
Trump tax reform, will it be enough? --- November 3, 2017
The U.S. Tax Cuts and Jobs Act has been tabled and is expected to pass the House of Representatives before year end.
The President and GOP politicians hope that these changes will be passed and that the new rules will provide a boost to the economy and the stock market and their electoral outcome in next year’s elections.
Does this plan represent the tax changes that people were expecting? Does it have any chance of becoming law?
The Bank of Canada cannot decide which way to go --- October 27, 2017
The Bank of Canada cannot decide. They tightened monetary conditions by raising rates, most recently in July and September, sending the Loonie higher. But this week they reversed course in dramatic fashion.
So which is the more likely path for interest rates in the next year? Higher or lower?
The last big loophole closes on Canadian housing finance --- October 20, 2017
The Canadian regulator of the largest financial institutions, called OSFI (Office of the Superintendent of Financial Institutions), tightened the rules again on mortgage lending this week.
On Monday, Superintendent Jeremy Rudin announced new measures designed to close a gap in the rules on qualifying for mortgages to buy housing.
Will this latest move be the final straw that triggers a correction in Canadian house prices?
Richard Thaler prize in economics --- October 13, 2017
Professor Richard Thaler, of Chicago, won the “Sveriges Riksbanks Prize in Economics in Memory of Alfred Nobel” for work on behavioral economics.
This award was controversial because many economists believe that psychological research is outside of mainstream economics.
Thaler’s approach is to try to understand economic activity by observing human behaviour directly.
Why would that be controversial?
The chair of the Fed is up for grabs --- October 6, 2017
The expiry of the first four-year term of the chair of the Board of Governors of the Federal Reserve System (Fed) is just a few months away, on February 1, 2018.
Chair Janet Yellen was appointed four years ago by Barack Obama. Normally the chair of the Fed is reappointed for a second term. But, according to Washington insiders, Yellen’s reappointment is far from secure.
Will a new Fed chair will be announced? If not Yellen, then who?
Koo balance sheet recession in Canada --- September 29, 2017
Almost twenty-eight years ago Japan’s stock market and housing bubble peaked. That country has been going through a massive correction called a “balance sheet recession” for much of that period, although recently signs of improvement can be seen.
The term “balance sheet recession” was coined by Richard Koo, author and economist from the Nomura Research Institute.
As the Bank of Canada is trying to normalize monetary policy while slowly deflating a housing bubble, it’s timely to have a look at Koo’s thesis.
Will a Japanese-style “balance sheet recession” come to Canada and will Canadians listen to Koo’s warning?
The Federal Reserve announced the end of QE --- September 22, 2017
Another meeting of the Federal Reserve Open Market Committee was held this week.
At the end of the meeting the Fed announced that they will begin to taper their ownership of securities held on their massive balance sheet, meaning that the monetary base will shrink.
How will this affect bond markets and interest rates?
Money creation is not what people think --- September 15, 2017
The money creation process has been shrouded in mystery for centuries, with different and confusing theories in circulation. While people realize that banks are central to credit creation, the mechanism that links lending to printing money is obscure.
Recently the Bank of England has explained the process of “printing money”, and it’s not what people think.
Guest post: Cryptocurrency mania --- September 8, 2017
Why didn’t I invest in Bitcoin?
We hear that lament often, especially as the aging bull market in stocks shows signs of weakness. However, the cryptocurrency mania, while interesting, has a long way to go before developing into a reputable long-term investment.
The Brexit process --- September 1, 2017
The Brexit process, started with a June 2016 referendum, continues to wind forward. But stress over Brexit is taking a toll on the life of British people, especially those in London. Business investment is suffering and the pound sterling is trading lower against most currencies.
Will Britain survive the Brexit process? Is it just a “spot of bother” or something more?
The Greenspan Put --- August 25, 2017
Alan Greenspan became Chair of the Federal Reserve System in August 1987, beginning an eighteen-year reign. Two months after he took over, on October 19, the Dow Jones suffered a one-day crash of 22.6 per cent; the largest one-day loss in history. The Federal Reserve took unprecedented action on Tuesday, October 20. Those interventions came to be known as the Greenspan “put”.
As central bankers and economists meet in Jackson Hole this week watch the speeches for a hint that the thirty-year legacy of the Greenspan “put” has run its course.
Debt-deflation: Fisher style --- August 18, 2017
American Irving Fisher (1867-1947) was the first economist to present a theory about debt-deflation. His work is considered important in explaining what happened in the Great Depression of the 1930s. Today people are rediscovering Fisher’s work, and applying what he wrote to the Global Financial Crisis in 2008-09.
What can Fisher’s theory tell us about the likely outcome of the housing speculation mania in Canada?
Queen Elizabeth II still waiting for an answer --- August 11, 2017
Queen Elizabeth II, in at the height of the Global Financial Crisis in December 2008, asked a group of economists at the London School of Economics the following question about the crisis:
“Why did nobody notice it?”
What answers did the economists and central bankers give?
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Nassim Nicholas Taleb's Black Swan --- August 4, 2017
In 2007 Nassim Nicholas Taleb published “The Black Swan: The Impact of the Highly Improbable,” which details the nature of unexpected and very rare events. Shortly after that book came out the world experienced Global Financial Crisis, which came to be known as a “Black Swan” event.
As the ninth anniversary of the collapse of Lehman Brothers approaches in September, 2017 it’s timely to ask: Are more “unexpected” events likely to happen?
President Donald Trump targets Canada on trade --- July 28, 2017
President Donald Trump and Wilbur Ross, his 79-year-old billionaire Secretary of Commerce, seem determined to get a better trade deal with Canada (and Mexico) by renegotiating the North American Free Trade Agreement (NAFTA).
Should Canadians be worried, especially about exports like softwood lumber and crude oil?
Retail industry downsizes --- July 21, 2017
The North American consumer is shifting buying preferences and the retail shopping industry is feeling it. New evidence of this trend arrives almost daily with yet another retail chain store bankruptcy and related struggles for shopping mall viability.
Will this disruptive change in how people shop spell the end of traditional retail stores and regional shopping malls?
The Bank of Canada finally did it --- July 14, 2017
The Bank of Canada did it. Finally, after seven long years, the BOC raised rates by a ¼ point, to 0.75 percent. Banks and other lenders immediately responded by hiking mortgage rates.
A quarter point is hardly enough to send shock waves through the Canadian financial system but it could be a turning point.
Canadian oil exports flood the U.S. --- July 7, 2017
Canada’s oil output is still growing, as a result of massive investments over the last two decades in Northern Alberta oil sands.
This increase in production will continue for many more years, according to some, as new plants are still being completed and expanded.
Can the United States continue to absorb all of Canada’s growing production without depressing prices?
Has Warren Buffett lost his Midas touch? --- June 30, 2017
Has Warren Buffett lost his Midas touch?
With his recent foray into subprime lender Home Capital Group, after a reported due diligence period of just three days, some observers are wondering if the world’s best-performing investment manager is past his prime, in his 86th year. Given Buffett’s stellar long-term track record as an investor, this question will be of interest to investors.
So I delved into Buffett’s recent decision-making and found a couple of intriguing clues.
Australia stands alone --- June 23, 2017
Australia stands alone with its massive housing bubble. Home price growth there has outpaced gains in most developed countries.
As well, increasing private sector debts threaten the stability of Australia’s financial system.
Is Australia’s housing and debt bubble likely to cause a financial crisis?
BOC highlights evolving risks --- June 16, 2017
The semi-annual Bank of Canada (BOC) Financial System Review highlights risks and vulnerabilities to the Canadian financial system. For several years the Bank has identified two key vulnerabilities — the “elevated level of household indebtedness” and “imbalances in the Canadian housing market”.
The central bank for Canada reiterated their concerns, saying that “the most important vulnerabilities … have moved higher over the last six months.”
Reigning in housing market speculators will require much more effort before authorities can declare, “Mission Accomplished”.
Bailout of the Canadian homebuyer --- June 9, 2017
Recently an article in Maclean’s by Kevin Carmichael appeared: “Why Ottawa should bail out homebuyers if house prices tank”. The article reminds me of the controversy that erupted in February 2009 over President Obama’s attempts to help U.S. homeowners during that real estate market crash.
If a similar debate happens in Canada, will we hear the same arguments?
Can we avoid another financial crisis? --- June 2, 2017
There’s a new book, Can we Avoid Another Financial Crisis?, that reveals new insights about the 2008-09 crisis and explains why another crisis is coming and gives workable solutions to avoid that future crisis, in just 130 pages.
The author, Professor Steve Keen, describes, in easy-to-understand prose, how mainstream economics failed us before 2008. And he outlines what he thinks will happen when current unsustainable trends reach their ultimate conclusion.
For anyone who wants to know what will happen next…
Impeachment: what are the chances? --- May 26, 2017
The U.S. President Donald Trump is in trouble over allegations concerning inappropriate cooperation between people in his campaign and the Russian government. Many investors have been asking if impeachment is likely and how it would affect the stock market.
Will President Trump be impeached? If he were, how would it affect markets?
Too much concentration --- May 19, 2017
My first book, “Investment Traps and How to Avoid Them” (Prentice Hall 1999) discussed how much of the value of the 1999 stock market was concentrated in just a few dot-com stocks. The S&P 500 in the U.S. market included a large number of highly valued companies in one narrow sector. As it turned out that was a major “investment trap” that hurt many investors in the 2000-2002 bear market.
Is there a similar concentration problem today in the U.S. market? In the world?
Real estate contagion --- May 12, 2017
Real estate contagion is the topic of the month in Canada. Will the recent troubles that have surfaced with at least one Canadian alternative lender spread to the wider real estate finance industry and the Canadian economy? How does a Canadian investor find a safe haven from possible spillover effects?
I covered this topic in “When the Bubble Bursts: Surviving the Canadian Real Crash” where I discuss some options to protect stock market investors from the fallout. Here’s an update.
Insanity of housing conditions --- May 5, 2017
The torrent of news regarding residential real estate in Canada and related matters such as mortgage financing and the instability of at least one lender accelerated last week.
The uproar around the news that Canada’s largest alternative lender had to seek emergency funding meant that almost everyone involved ignored the release of CMHC’s quarterly assessment of the risks facing the housing market.
There are some interesting tidbits in the report. And I would like to suggest a new category to their proprietary risk assessment ranking, borrowed from comments about the U.S. housing bubble of a decade ago.
Wind power goes offshore --- April 28, 2017
At the same time as OPEC struggles with a decision to extend the agreement to cut crude oil production the expansion of alternative energy sources is booming. One source in particular is gaining credence, at least in Europe.
Offshore wind power was once dismissed as too expensive. But installations of this new energy source are growing rapidly and could be significant for electricity production sooner than most realize.
Ontario's gamble on housing --- April 21, 2017
This week the Ontario, Toronto and Canadian governments met to decide how to “fix” the real estate market in Toronto and Greater Golden Horseshoe in southern Ontario.
And on Thursday, Ontario’s Minister of Finance announced 16 new measures that are designed to reign in out-of-control housing markets in his province.
Are these measures enough to make housing affordable again?
Guest post: Robo-advisors have yet to be tested --- April 14, 2017
The latest competitor in investment management is the online portfolio manager – colloquially known as a robo-advisor. These platforms build a portfolio of exchange-traded funds (ETFs) for investors on the basis of a short questionnaire.
While convenient and low-cost there are problems with relying on this technology.
Brexit triggered --- April 7, 2017
Prime Minister Theresa May wrote a letter March 29 2017 to Donald Tusk, President of the European Council, to trigger the process of negotiations for the United Kingdom to exit the European Union.
Europe’s immediate response indicated that discussions could be contentious.
Did the Prime Minister make a mistake in deciding to revoke membership in the European Union?
The rapid growth of debt in China --- March 31, 2017
The current period of rapid growth in China’s debt burden will end at some point. Some analysts believe that China will be in crisis in 2017 while others maintain that China can continue to borrow more indefinitely.
Can China’s debt bubble just keep getting bigger forever?
An alternative to condos --- March 24, 2017
In my 2015 book, “When the Bubble Bursts: Surviving the Canadian Real Estate Crash,” I singled out the condominium as a rental property as a particularly bad idea. Recently, I had the chance to spend an hour with a top investment analyst, Jimmy Shan. He covers the real estate sector analyst for GMP Securities and he’s done the calculations: condominiums are a terrible investment.
And he outlined an alternative — much better than condo ownership — for someone who is determined to invest in residential real estate as a landlord.
Guest post: Give yourself a bonus and defer CPP --- March 17, 2017
Many Canadians know that they receive a discount or bonus if they choose to receive Canada Pension Plan (CPP) payments either before or after age 65. But Canadians often aren’t aware how significant the discount or bonus can be and what other factors may influence this decision.
In some cases taking early CPP may make sense but given rule changes and rising life expectancy it can often be a better choice to defer CPP.