Tuesday, March 25, 2014

Market update

So back to reality of the North American markets.

Last week I heard an interesting comment that Europe was keeping the Euro strong so that inflation not become an issue (Since June 2013 the Euro is up from 1.3 to the USD to 1.37).  Considering the self interest of the source as a major North American exporter to Europe (who is making a killing on the F/X) its not surprising, but the analysis looks flawed.  There is no doubt that a strong currency can impact the rate of inflation; but evidence does not support this assertion.  Few economies are as open as Canada, and the Lonnie has been on a one way elevator down (for about 12 months now) from above parity to the US Dollar to slightly below 0.90 to the USD today, a 12 % drop.  Yet there is little inflation here(the Consumer price index kind)!  Real estate price continue to defy gravity, the Canadian Stock market (S&P/TSX index) is up 6% for the year so far (that's 24% on an annualized basis), and here's Canada CPI chart up to February 2014:

No inflation here...

Of course the problem with the European version that a strong Euro keeps inflation at bay is even more discredited by the fact that Europe is largely a closed economy.  A strong currency would therefore have limited impact on Europe's inflation, since only about 10% of GDP is with outside trade.

Cracks began to emerge in the American real estate market a few months ago.  An ever increasing number of properties were being sold on an all cash basis, an indication that the buyer are financial institutions (read hedge funds) looking to generate economic rent from tenants (and capital gains on eventual disposition).  Part of the problem is that economics of these trades are not what they were once;   5 years ago when reasonable properties were sold in lots of 25 or 50 to hedge funds that were ready to live with empty building for a few years and to make the necessary improvements to attract tenants.  But the past 12 months (up to December 2013) saw a massive 17% increase in real estate prices (the Economist)

The economics have changed the smart money has moved on.  So the markets are freaking out!  Moreover that's for the housing prices, considering the damage that Amazon is doing to the average mall (without generating any real profits) it amazes me how well commercial real estate income trust continue to perform.  I cannot remember the last time I bought goods in a store.  So the malls are dying and real estate is back in trouble.  However, this time around the guys suffering are hedge funds and their "rich" investors-- and not the banks.  My guess is that Congress will pass new "hedge fund saving legislation" very quickly.  After all, you got to support the guy who got you elected.

Around the globe (excluding Canada) markets have had terrible performance an indication that the high mark for p/e has been reached  -- maybe that's where Canadian inflation is hiding...  Global companies have played the GAAP game to an extent that there's no more room for "improvement" and investors are beginning to notice.

Bond markets are going nowhere and the story remains depressing -- there is no demand inflation because the average wage earner is being squeezed by the excess labor available.  This has created a depressed economy that is unable to see future upside.

Finally, my European buddies are still saying that things in Europe are stabilizing... yet nothing in the debt side of the equation has changed.  My guess now is that with Ukraine situation nothing will happen.  Commercial loans that mature will be slowly replaced by ECB loans that will bailout the banks (and the pension funds that are exiting the sovereign loan market as fast as they can).  Someday, the Germans will wake up and figure out that war was not necessary.  They will own all of Europe because they will old all the debt owed by Greece, Portugal, Spain, Italy and yes even France...  the good times are here!



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