For every debt there is a creditor and this makes the government’s efforts to support the economy extremely tricky.
Consider a hypothetical apartment building with a significant number of tenants working in restaurants or other retail operations that are now closed. With no money coming in, these tenants might be able to make April 1st rent but the May payment becomes an impossibility for most of them.
Assume the government offers rent forgiveness to these tenants in some way, a humanitarian initiative. The problem here is that most building owners financed the purchases with large bank loans. These loans require monthly payments to the bank funded by rents that are now not coming. Payment forgiveness for the building owners too?
Then it’s the bank’s problem, along with all the other thousands of similar cases - Tim Hortons franchise owners, optometrists, restauranteurs, auto plants halted because of supply chain issues - everybody.
The Bank of Canada would need to support all the banks and other lenders in the same predicament, at a huge monetary scale.
In a Tuesday research report, Citi’s U.K.-based credit strategist Matt King expressed skepticism that government support can prevent mass credit defaults,
“Emmanuel Macron has bravely pledged that ‘no business will be at risk of bankruptcy’ and ‘no employee will lose a cent’ as a result of coronavirus restrictions… Other governments are rapidly trying to come up with relief schemes of their own. Unfortunately we struggle to see how they can achieve this. … Even more daunting than the magnitude are the logistics…. Which businesses deserve bailing out, especially when they operate internationally?... Given that many businesses have payments coming due in a matter of days, how can you hope to get the right amount of money to the right places in time? ... the risk that missed payments start to create a cascade of credit defaults seems quite high”
Mr. King’s perspective is global and among the more pessimistic, I’ve seen. Canada, importantly, is much better positioned to handle these problems than most countries.
The financial system is healthy and centralized, making it easier for the central bank to support them. The health care system has, so far, held up tremendously and faith remains in the other necessary government bureaucracies that will get us through what will hopefully be a short-term crisis.
The challenge remains less one of scale – the funds will be there – than speed and complexity, as Mr. King notes. The goal is to prevent temporary economic dislocations from becoming permanent through business closures and unemployment. To accomplish this, government support will have to reach literally millions of Canadians, directly and indirectly, and very soon.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Canadian dollar sinking: The petro-loonie resurfaces at exactly the wrong time
The loonie picked the exact wrong time to re-establish its link with crude oil prices, as it continues to be dragged lower by a global war for oil market share between Russia and Saudi Arabia that has resulted in a price collapse. Scott Barlow analyzes where the wounded loonie may be headed next.
How young investors are reacting to their first major market rout
After seeing their stock portfolios mostly rise in recent years, 20- and 30-something investors are living through their first lengthy market rout, with mixed reactions. Some are taking the losses in stride, citing the decades left until they retire – and even looking for buying opportunities in this bear market – while others are pulling money from their portfolios to have funds on hand amid the economic downturn caused by the spreading novel coronavirus. Others are simply relieved they haven’t invested much, if anything, spooked after watching their parents suffer through similar losses during the 2008-09 global financial crisis. Brenda Bouw reports
What the lessons of 9/11 say about how investors should be positioning right now
Although everyone is comparing the current shock with what happened in 2008-09 during the financial crisis, David Rosenberg thinks the appropriate benchmark is the 2001 terrorist attacks. He looks at what that means for finding undervalued sectors amid the selloff.
Why bond ETFs haven’t quite been the life preserver investors hoped for
It seems almost petty to say the performance of bond exchange-traded funds lately has been disappointing. But wasn’t the whole pitch for diversification with stocks and bonds that when the stock markets zig, bonds zag? It hasn’t really happened in the recent stock market sell-off. ETFs holding bonds have done light years better than equity funds, but they’ve still lost a bit of ground. Rob Carrick looks at why.
Why dizzying daily swings have become common amid the pandemic
With the coronavirus wreaking havoc on financial markets, every opening bell seems to kick off a new odyssey, as months’ worth of volatility are squeezed into days, and days into minutes. The pandemic has sent the world of finance into convulsions, with dizzying daily swings and a concentration of volatility in the final minutes of each trading day. These patterns are not unusual in the scarier moments of a bear market, but are being magnified by the prevalence of automated, mechanical trading systems. Tim Shufelt reports
Own plummeting Canadian energy stocks? Here’s what is likely to happen next
If you own Canadian oil stocks, what should you expect? Gordon Pape has a few predictions as the sector continues to take a historic pounding.
Others (for subscribers)
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: CEOs are buyers of these two high-yielding securities
Tuesday’s Insider Report: Director invests over $2-million in this high-yield stock
‘Pure madness’: The toll of the stock market plunge
BMO leaves year-end target for TSX unchanged, suggesting monster rally by year-end
Number Cruncher: Six resilient stocks available at deep discounts
Others (for everyone)
Up 3,000%: The tail risk funds that mastered coronavirus market mayhem
I just started investing two years ago and I am freaked out. Should I sell everything?
Last of Dow’s gains during Trump presidency disappear
Ask Globe Investor
Question: I’ve been investing for a while but as a non-resident of Canada. Now that I am a resident again, this is the first year that I am faced with paying more attention to investing in a non-registered account and thinking of tax implications. I want to learn more about taxes (interest, dividends, and capital gains) and I am wondering if there is a book or publication that you can recommend.
Answer: Your best choice is Essential Tax Facts by Evelyn Jacks, one of Canada’s top experts in the field. The 2019 edition is currently available. The rules haven’t changed significantly for 2020 so it should provide all the information you need.
--Gordon Pape
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