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

 

Higher inflation here to stay --- February 16, 2018

Higher inflation is here, probably to stay for this cycle. The Federal Reserve’s projections of modest interest rate increases prior to the CPI report on February 14 could be changed to indicate a faster path to higher rates.

Will reports of elevated inflation mean that rates are going higher, sooner?

Read more....

-PDF version of this post-

 

CNN says that NAFTA talks could collapse --- February 9, 2018

In January 2018 headlines flashed on CNN that “NAFTA negotiations [are] close to falling apart.”

Most people have come to understand that Canada and Mexico could be facing demands by the U.S. that are not acceptable to them, and that the North American Free Trade Agreement (NAFTA) could end. Prime Minister Trudeau has said publicly that Canada is prepared to walk away from a bad deal and it looks like that is what is being offered. President Trump is on record as hating the NAFTA deal.

What would it mean if the NAFTA is cancelled?

Read more....

-PDF version of this post-

 

Generating income with junk bonds --- February 2, 2018

Generating income is difficult these days. As more and more retirees find they need more income, they will engage in a potentially dangerous activity called “chasing yield”.

One option for those determined to find higher income is to invest in “high-yield” or “junk” bonds.

Are junk bonds worth the risk now?

Read more....

-PDF version of this post-

 

What to do with expensive stock markets --- January 26, 2018

The Shiller Cyclically-Adusted Price-to-Earnings (CAPE) Ratio for the S&P 500 is showing that the U.S. stock market is expensive. The valuation premium is unmatched, except for the 2000 peak.

Are valuation measures like the CAPE warning investors to avoid the U.S. stock market?

Read more....

-PDF version of this post-

 

What keeps central bankers awake at night? --- January 19, 2018

The Bank of Canada hiked rates again, to the not-very-elevated level of 1.25 percent. The reasons given were the strong economy and an inflation rate that has reached the 2 percent target.

But Governor Poloz warned that “raising the policy rate too quickly would risk stalling the expansion” and Carolyn Wilkins, Deputy Governor, in response to a reporter’s question, said that she is losing sleep over the elevated level of household debt.

Will Canadian central bankers lose their nerve before they finish raising rates?

Read more....

-PDF version of this post-

 

The bond bear market might have started in 2016 --- January 12, 2018

One year ago I wrote about the biggest bond market rally in history that had been in place since 1981, when benchmark bond rates peaked at 15.8 percent. Now, after more than 36 years of drifting lower, interest rates on government bonds in the U.S. (and Canada) have pushed higher. The 10-year US government bond generated a paltry yield of 1.45 percent in July 2016 but now offers 2.55 percent.

Are rates heading to even higher levels, meaning that a bear market in bonds has started?

Read more....

-PDF version of this post-

 

The mania for cryptocurriencies continues --- January 5, 2018

The cryptocurrency mania continues to heat up. Bitcoin, the best-known one, is trading at US$15,000 giving it a market cap of more than $250 billion. A newer cryptocurrency, called Ripple, is threatening to surpass Bitcoin.

With everyone talking about cryptocurrencies is it time for investors to take a look?

Read more....

-PDF version of this post-

 

The electric power grid must deal with rapid change --- December 29, 2017

The North American electric power grid has its origins in the early part of the 20th century. With increasing demand for reliable electric power and more complicated applications like computers, internet, banking, medical devices and smartphones, the grid now struggles to meet the challenges of the 21st century.

Will the grid improve quickly enough to meet modern needs? Or will it become obsolete?

Read more....

-PDF version of this post-

 

China’s dangerous debt bubble --- December 22, 2017

China’s corporate sector debt bubble is the most extended in the world. Debt in that category has been expanding at an unprecedented pace for more than a decade.

Will China’s government try to reign in debt growth in the near future? Will that result in a significant recession?

Read more....

-PDF version of this post-

 

The Federal Reserve’s slow approach to raising rates --- December 15, 2017

This week the Federal Reserve announced another small increase in the Fed Funds rate. This latest increase is the third this year, and the fifth since late 2015 when this round of monetary policy tightening started. The Fed Funds rate is still low by historical standards.

Will there be more rate increases in 2018? Why is the Fed moving so slowly in this cycle?

Read more....

-PDF version of this post-

 

OPEC met to extend production cuts --- December 1, 2017

OPEC met this week and decided to extend the crude oil production cuts to the end of 2018.

The persistent glut in crude oil inventories is difficult to shrink while U.S. production continues to grow, primarily from shale oil fields.

Will the production cuts be enough to keep the oil price above $50? Or will prices plunge as OPEC has lost control of the market?

Read more....

-PDF version of this post-

 

The Keystone XL pipeline was approved this week --- November 24, 2017

The Keystone XL pipeline was approved by the Nebraska Public Service Commission this week.

This pipeline expansion would allow additional amounts of bitumen and crude oil to reach refineries on the U.S. Gulf Coast, primarily in Texas.

Is this decision a significant milestone for Canadian crude exports? Or does Canada need more pipeline capacity for exports to new markets outside of North America?

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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?

Read more...

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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.

Read more....

-PDF version of this post-

 

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.

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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.

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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?

Read more....


-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

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.

Read more....

-PDF version of this post-

 

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?

Read more....

-PDF version of this post-

 

For a specific post earlier than this since December 12, 2014 - Please email Fraser