Midas Letter Capital Markets Advisor Steve Misener on Global Slowdown and Canadian Consumer Debt

Midas Letter Capital Markets Advisor Steve Misener, CFA discusses the slowing global economy and rising Canadian consumer debt. Misener talks about the Federal Reserve System and why Fed Chairs feel the need to show independence. He laments that Fed Chairs tend to illustrate their independence by being hawkish on interest rates, often to the detriment of the economy. Misener is concerned about the rise in Canadian consumer debt. He notes that Canada has the highest household debt of G8 countries at over 100 percent. Canada’s hot housing market has only added to this problem in major urban centres, according to Misener. Misener breaks down daily use trends for alcohol and cannabis in the United States and finds that while daily alcohol consumption still leads the way, daily cannabis use has tripled over the past decade.

Transcript:

Ed Milewski:  Joining me now, Steve Misener, veteran of Bay Street and man of all seasons, man for all seasons. Steve, you’ve done a lot of things on Bay Street and managed money; you’ve been on the show many times. Lots going on. It looks like the world’s slowing down. It looks like it, and yet markets are close to their highs in the States.

Steve Misener: Well, it’s a cross-current on the stock market, because it certainly looks like the Fed tightening has maybe run its course prematurely based on what the Fed was saying. But that would be the case because of a slower economic forecast. Today they just revised the fourth quarter GDP from 2.6 percent down to 2.2, and that’s a big revision.

Ed Milewski:  Yeah.

Steve Misener: And so that brings the year in last year at 3 percent for the whole year, by one measure, although there are other measures that say it was 2.9. It’s getting crazy that there’s actually different ways to calculate. But stocks like lower interest rates, but lower interest rates – rates can only fall when the economy is slowing, and that should lead to possibly lower corporate profits. So you’ve got this dichotomy that the market seems to be up a little today, even though the economic indicators are pointing to a slower…

Part of it, though, is the US dollar, and the US is the safe haven. And this is compared to other economies around the world, and money flocks to the US dollar and US stocks.

Ed Milewski:  Right. You know, it wasn’t that long ago, October, when the Fed chairman came on, and, you know, we’re going to raise rates now, we’re going to do it again – he was so hawkish. And then, like the world we saw, the stock market got punished, obviously, at the end of last year, it’s had a great run-up. But what an about-face. It really was dramatic, what is dramatic. So interest rates, I mean, the 10-year rate in the States has dropped precipitously, here.

Steve Misener: Yeah. I mean, I think it’s the 7-year bond in the States is the lowest since 2017, so I mean, the yields have come down really dramatically, which is an about-face from what the market was thinking. But whenever there’s a new Fed chairman, it always seems to be, whether it was Yellen or Bernanke or people before them, Greenspan, even, they always feel like they need to show their independence. And they show their independence by beating their chest and taking a gunslinger stand and saying ‘I’m the new Sheriff in town, and no President or Congress is going to tell me what to do. And so I’m going to show how tough I am’. And the only way they can really show it is by being hawkish and aggressive on rates, and it usually leads to them overshooting what needs to be done, because the 4.2 percent that we had in GDP in Q2 last year was the high-water mark, and clearly it was. And now the market’s saying that they didn’t need to tighten rates as much, and they certainly didn’t need to scare the hell out of markets in December by not just the rate hike but the forecast of future rate hikes for this year.

And now, to be even considering a neutral, if not a dovish, stance of cutting rates is quite a turnaround in 90 days, or 100 days. It’s unbelievable, and it shows that they, you know, erred on the aggressive side and now they’ve got to talk their way out of it.

Ed Milewski:  And, you know, while we’re talking about interest rates, I see that the German 10-year went negative again for the first time, since, what, 2016 or something like that. But a lot of money now. A lot of this debt that’s out there is yielding negative rates. I guess you don’t yield negative rates, you pay. I still have a hard time getting around it, but…now, what about the Canadian consumer? I bet the consumer’s got some issues, here, like he’s got lots of debt?

Steve Misener: Yeah. The piece came out the other day, we can’t put it up on the screen unfortunately, but it shows of the G8 countries that Canada has the highest, sorry, the highest household debt as a percentage of gross domestic product, or GDP. It’s over 100 percent. Next closest is UK, at 86, and getting down to, say, US at only 78. So the Canadian consumer is carrying an awful lot of debt as a percentage of the size of our economy. I mean, they’ve been kind of drawn in with low rates; all these countries have been drawn into the borrowing side with low rates, and of course, in Canada, kind of accentuated by a fairly hot real estate market in the major urban centres. Not across Canada, but certainly the urban centres, and people having to borrow more to get into that and crack into the housing market.

So that is a concern for consumers, and for the economy, but also for the Canadian banking sector – just keeping an eye on that. Hopefully it will have, you know, peaked out at this point.

Ed Milewski:  Yeah. And we’ve seen, I mean, you mentioned real estate in major centres. Things have changed in Vancouver. Things have changed in Toronto, although the apartment building, the condo thing, seems to be hotter than a firecracker.

Steve Misener: It seems to still go. I mean you look for – one of the key indicators for anyone wanting to follow the real estate market is the average number of days that a particular type of property stays on the market.

Ed Milewski:  Right.

Steve Misener: And the longer that it is, and I’m not sure where it’s at, but I mean, the idea that something, a condo comes up or a house comes up and it’s a bidding war and it’s gone in a few days, that’s obviously peak time type of action and pricing. It’s been like that for a while. So if you start to see that there’s a elongated, even by days or weeks, that listings are lasting, that’s an indication that we’ve maybe crested out. But it’s hard to say.

Ed Milewski:  And with rates still low, if things do slow down, what kind of bullets do these Central Banks have? Like, are we running out of, like, trump cards? Like, you know, it just – you just wonder, has there been just too much intervention?

Steve Misener: Well, it’s a bit of a treadmill, I suppose, because rates are so low that your question, and your point, is how low can they go? Like, a limbo rod when people are limbo dancing underneath it, and is it stimulative to cut rates further? And when rates are already negative at the short end and now to the intermediate end in several countries around the world, you can’t cut rates any lower when they’re at zero. So that does reduce the flexibility of the Central bankers. But we’re in this kind of debt game where it has to be sustained at low rates, because clearly, the slight raises – and I think we’ve had about five raises in Canada – and those higher rates are starting to bite, now, even at 1.75 percent.

Ed Milewski:  I know, because of the big debt loads you alluded to.

Steve Misener: Yeah, and so we need to see some – the fact that they’re already starting to cut, I mean, it’ll be a benefit to Canada if the US feels that they need to cut, because that’ll give us more breathing room than we’ve had. Because we had to follow rate hikes lockstep, not so much because we had a heated economy, but because we’ve got a $0.75 dollar. And if you don’t follow the US rate hikes, the dollar will drop, and that’s inflationary. That imports inflation.

Ed Milewski:  And so, you know, and look, it seems to me that things have slowed down in the world. We’ve had rates, you know, the Fed said no more rate increases this year, maybe one next year, and the stock market likes low rates. But is it low rates for the right – as you alluded to – for the right reason? In other words, are we slowing down? If we’re slowing down, the market can’t keep going up, can it?

Steve Misener: Well, remember: all asset classes are a relative choice, it’s not about something being necessarily absolutely attractive, this is so great, I have to own it. It’s about, where do you put the money? And short-term money may go into Treasury bills when investors are uncertain and the outlook is unclear, but if it’s a zero return or negative return with these negative rates, money won’t stay in there very long. It stays in there till it calms down, until, and then people look at other opportunities.

So yield stocks will always continue to draw attraction if the dividends are safe, or the real estate investment trusts, they will benefit, and they have had a rally of late with the reversal in rates. But people will buy stocks if the bond market’s not attractive, and right now, the bond market’s had its rally. It moved very quickly, and that’s what’s underpinning stocks – not so much the economic outlook being super rosy.

But remember, we’re not, it hasn’t forecast recession in the US. It’s just a slowdown. Maybe it’s two points this year, or one and a half, perhaps, rather than three last year, but it’s still growth, and it’s net real growth.

Ed Milewski:  Yeah, very interesting, very interesting. I don’t know if you follow the company CannTrust; they reported, they were supposed to, they were guiding 21 million revenue, and they actually guided about 16. I don’t know if that’s a one-off or if that’s a trend. You’ve done some work recently on some trends in alcohol consumption and cannabis consumption.

Steve Misener: Yeah. I was looking up, I just thought it was interesting because we are seeing in this attractive long-term, really, evolution of the cannabis industry, especially from being an underground industry to mainstream legalization, including in the US, state by state. Some stats I looked up were interesting, and they really, from 2006 and then updated to 2017, and the 2017 numbers are the latest that I could find. But they, for instance, daily users: now, we’re not talking about whether it’s an abusive thing, particularly, with alcohol, but I mean, a daily user is someone who may have a drink on a regular basis. A daily user is defined as at least 300 days a year out of 365, so that’s the definition – noteworthy.

Ed Milewski:  I’m a daily user.

Steve Misener: The number one – like, alcohol in 2017 is about 12 million Americans, have a drink, deemed to be a daily drinker, you know, at least 300 days a year, 12 million Americans. In 2006, for instance, the estimate for cannabis – and who knows, because it was, this is their best estimate – was 3 million daily users of cannabis in 2006. But that has tripled to almost between 8.5 and 9 million as of 2017. So we’re seeing this ramp up; obviously with passages of legalization on the west coast, in California, Colorado, that would have been a major influence on that, certainly. But also it’s the general bias and decline against alcohol use, and in some cases the view that cannabis use in moderation is perhaps a little healthier, or at least, you know, doesn’t have the negatives that alcohol has.

Ed Milewski:  Sure.

Steve Misener: So it’s interesting to watch that, and another couple of points say that 1 in 15 Americans have a drink deemed on a daily basis; again, 300 days a year, 1 in 15, and that 15 percent of Americans use cannabis at least once a year. So I’m not saying that these trends are material to your investment decision, I was just looking up some of the trends and I thought they were interesting. And the 15 percent of Americans who’ve used cannabis at least once in a year in 2017, that’s up 10 percent from 2006. And obviously with edibles and vapes and things where you don’t have to actually smoke it, which is going to be deemed to be of lower concern for consumption issues or health issues, that’s going to – we’re seeing a continued climb in cannabis use, both from legalization and the ease of use.

Ed Milewski:  It’ll be interesting. I’m wondering if liquor sales are starting to come off a bit.

Steve Misener: There’s – well, just one last stat: in Canada, the per capita – that’s not aggregate, but the per capita consumption of hard alcohol in Canada, guess what year that was, Ed? The peak in per capita alcohol…you have to think back to the –

Ed Milewski:  I’m going to say 2005.

Steve Misener: No, you have to think back to the days of the Mad Men TV show. Mad Men TV show. It was 1971. That was peak hard alcohol consumption in Canada. Then wine and beer came on after that.

Original article: Midas Letter Capital Markets Advisor Steve Misener on Global Slowdown and Canadian Consumer Debt

©2019 Midas Letter. All Rights Reserved.