A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
The U.S. Federal Reserve has a new, important, and under-appreciated problem that in a worst-case scenario may mean they have lost control over short-term interest rates. The problems are deep within the plumbing of the credit system, but Bloomberg's Matthew Boessler did an excellent job trying to explain the situation in simpler terms,
"The central bank has had trouble controlling near-term borrowing costs since the 2008 financial crisis and has been experimenting with ways to do so. While its main new tool has enabled the Fed to exert more influence over money-market rates in the past year, strategists from Barclays Plc to Goldman Sachs Group Inc. say the program is too small to prevent rates from falling when officials want them to climb."
Kevin Ferry of Cronus Futures adds, "in the old days the system wholesale funded itself (much off balance sheet) with non-securitized non-collateralized transactions linked to the lie called LIBOR. Not anymore. The system funds itself through securities funded with the collateral of other securities. The Fed has created a massive bank asset called excess reserves."
In short, Fed chairwoman Janet Yellen may decide to raise interest rates, and it may have no effect at all in bond and credit markets. This would be, to say the least, uncharted territory.
"The Fed Still Needs to Figure Out How to Raise Rates" – Boessler, Bloomberg
"We're All Free Riders Now" – Ferry, Contrarian Corner
Yale lecturer and portfolio manager Vikram Mansharamani called Canada's housing market "Looney Toons" earlier this week, which is not encouraging,
"Canada is now among the most vulnerable large economies in the world…household debt is now >160 per cent of disposable income – meaning it would take ~20 months for a family to pay off its debt if interest rates were 0 per cent and they spent 100 per cent of their disposable income to do so… there is now a booming private mortgage market in which ordinary citizens are borrowing from their home equity lines to lend money to desperate borrowers. … It's only a matter of time before this shadow mortgage banking market slows, and the ramifications are likely to be enormous."
Picking a market top in a large asset class like Canadian housing is a mug's game and this, along with falling mortgage rates, is the reason I'm less concerned with ex-Alberta home prices this year. Mr. Mansharamani is doing everything he can to upset my equanimity.
"Crazy Canadian Credit Confronts Crude, Eh?" – Mansharamani.com
The Institute for Economics and Peace reports that the violence on Mexico's border is declining sharply:
"Violence and crime have fallen in 26 of the 32 Mexican states since 2012, yet under-reporting of violent crime and rape and a lack of prosecutions remain worrying, according to the Institute for Economics and Peace (IEP)."
This is an unmitigated victory for any reasonable, thinking, human being, but it also means that Canada will have even more difficulty diverting foreign manufacturing investment from low-wage Mexico. The news underscores the fact that Mexico has been eating Canada's lunch for auto sector investment despite the horrendous human tragedy of over 100,000 people killed in the ongoing drug war in the country.
"Mexico sees fall in violence, despite drug war: index" – Reuters
I was stunned and appalled by this – people in the developing world are being murdered over sand:
"Paleram Chauhan was killed over sand. And he wasn't the first, or the last. ... Battles among and against 'sand mafias' there have reportedly killed hundreds of people in recent years – including police officers, government officials, and ordinary people like Paleram Chauhan. ...sand is a finite resource like any other. The worldwide construction boom of recent years – all those mushrooming megacities, from Lagos to Beijing – is devouring unprecedented quantities; extracting it is a $70-billion (U.S.) industry… Sand mining has erased two dozen Indonesian islands since 2005."
"The Deadly Global War for Sand" – Wired
Tweet of the Day: "@ReutersJamie $44B outflow from US equity funds year to date, worst start to year since 2009. "Restoration of EPS confidence needed for US inflows" –BAML"
Diversion: "Hilarious TV Ads From The Dawn Of The Home Computer Era" – i09