Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
I had some personal experience with Ewen Cameron-Watt, who is now the chief investment strategist at mammoth asset management firm BlackRock Inc., in my previous career and came away extremely impressed. This experience gives further credence to a column written by Mr. Cameron-Watt in today's Financial Times that represents a pointed warning to investors in income and dividend sectors. The article discusses central bank quantitative easing and its unintended effect of creating a scarcity of safe investment assets:
"Assume the Federal Reserve and Bank of England stop reinvesting the proceeds of maturing issues while the European Central Bank and Bank of Japan press on with QE. The shortage shrinks to roughly $1.7-trillion, we estimate. It is not until 2017 that equilibrium begins to return. This ends at best in a bigger dose of indigestion than seen recently. At worst, an uptick in the supply of high-quality liquid assets or change in rates expectation sets in motion a vicious circle of selling."
The potential "vicious circle of selling" would create big losses for Canadian investors in all income sectors including the crowded trades in REITs, utilities and high yield bonds.
"Investors on 'safe asset' starvation diet" – Cameron-Watt, Financial Times
Goldman Sachs predicts that the WTI crude price will fall to $45 (U.S.) per barrel by October:
"A recovery in prices to near $60 a barrel from a six-year low in March is premature, analysts including Jeffrey Currie said in an e-mailed report dated May 18. The availability of cheap capital exacerbates the need for sustained low prices to keep U.S. producers from boosting output."
Support for this thesis comes from the Middle East where Saudi Arabia is producing oil at new record levels.
"Goldman Sees Oil at $45 by October After 'Self-Defeating' Rally" – Bloomberg
"Moody's forecast darkens for debt-laden U.S. producers" – Fuel Fix
"@SoberLook Chart: Saudi crude production hits a record - pic.twitter.com/Qwx9MTi3Dx" – Twitter
See also: "Why U.S. oil rig counts are about to start rising" – Barlow, Inside the Market
The Fraser Institute has released a definitively "man bites dog" report suggesting that Canadian household debt isn't a problem at all:
"By several metrics, household debt in Canada is not excessive. The burden of servicing debt is at a record low. Debt is often used to create wealth, and household assets and net worth have increased much faster than debt. Despite lower interest rates, the rate of growth of debt has slowed by one-third since the recession."
This is probably true, as housing affordability statistics are still well in-line despite soaring real estate markets, but only until the growth, employment or interest rate environment changes for the worse.
"A Longer-term Perspective on Canada's Household Debt" – Fraser Institute
A HUGE market blow-up for one of China's largest companies highlights the sketchy nature of the recent surge in the country's equity markets. Solar equipment provider Hanergy Thin Film Power lost $19-billion (U.S.) in market cap in mere minutes in the overnight trading session:
"For months, analysts and journalists have publicly questioned why Hanergy's stock continued to go up, despite doubts about the company's underlying sales and unusually rich profit margins, which relied mostly on transactions between Hanergy and its mainland China-based parent company, Hanergy Holding Group."
"Hanergy Thin Film Power lost $19 billion in market value today – here's who else got burned" – Quartz
"He had something to do" – McCrum, FT Alphaville
"China – all part of the plan?" – Keohane, FT Alphaville
Tweet of the day: "@carlquintanilla Here's Goldman's explanation as to why low gas prices haven't brought better consumer spending (h/t @EamonJavers) pic.twitter.com/lLb8Wit7RV"
Bonus Tweet of the Day: "@Brenda_Kelly I reckon going for a drink with George Soros would be rather depressing."
Diversion: Harvard law professor Lawrence Lessig presents "the problem with American democracy in three charts." Summarized in one phrase, "legislative capture by big money" – Quartz
Scott Barlow