Back in 2012, it was my assertion (and many others’) that
we were entering a ‘nuclear winter’ of resource investment that would persist
for years. At this juncture, I wish I had been wrong, but such is not the
case. I feel now when writing about metals that I’m visiting an old friend in
the hospital who’s prognosis is uncertain. Thus I find myself back in the
world of technology and life sciences, from where I began. C’est la vie.
Interestingly, in 1999, as I was launching a technology
start-up what ultimately became an analogue to what Amazon.com (NASDAQ:AMZN) is today (they were much better funded), the resource market in
Canada was in a state of purgatory very reminiscent of what it is today.
Then, as now, technology stocks were flying, markets were setting records
daily, and it felt like the party was never going to end.
So one might be forgiven for thinking that the same
outcome as then is poised to descend on the market now. But neither is that
the case. The reason why is because, whereas at the end of the bull market in
tech stocks in 2000, there was a finite amount of money that survived, and so
the stage was set for the next bull market in Real Estate. There were no
bailouts for investors or funds that went overboard at the trough. At the end
of the dot com crash, a great cull had occurred. The weak had been
eliminated, and the stronger, wiser entities (arguably) survived. So when the
next bull market presented itself, there was ostensibly a limit as to how
much money would go that way.
But that bubble was inflated to record diameter by an increasingly easy
credit regime induced by Fed Chairman Alan Greenspan, now universally reviled
as the man who almost single-handedly fueled the crisis that began in 2007.
This Time is Different
But in this iteration of tech stock mania, the valuations of companies are
not being driven by the immense perceived future value of these technologies,
but by the sheer deluge of cash and credit that exists in the system as a
result of $3 trillion in quantitative easing (now ‘fractionally banked’ into
at least 8 times that amount in credit) chasing anything with a heartbeat in
the U.S. market.
And only in the U.S. market are asset prices inflationary, whereas in
almost all others prices are highly deflationary, because the U.S. has [put
an unequivocal floor on asset prices by demonstrating in no uncertain terms
that if demand was not forthcoming naturally, it will be conjured up by the
might pen of the U.S. Federal Reserve. So not only has real demand been
subordinated to the much more reliably deliverable ersatz demand of stupendous
amounts of fabricated capital and credit, but that brute force support has
rendered all other markets unattractive to capital pools just trying to chase
enough alpha to keep them alive.
I’ve been making the case since around 2012 that Canada had better quantitative
ease in equal step with the U.S. else risk market deflation, but we are in
possession of a banking system, government and establishment best categorized
as ‘smug’ in their worldview of Canada’s role in the global financial system.
We apparently are to retain a prudent and conservative approach, because that
saved us from the various crises in Real Estate, asset-backed paper, and
credit swaps that nearly sank AIG, Citibank, Goldman Sachs, J.P. Morgan et
al.
While that hindsight may be of comfort to the banks who maintained a
conservative approach to credit expansion and asset securitization, the
aforementioned deflation has now spread from the mining sector to the broader
Canadian market, and oil price weakness has now caused a deflating of the energy
sector. If prices persist below $65 a barrel throughout 2015, there will
likely be a downward revision of everything from bank valuations to GDP to
the Canadian dollar. While lower oil prices act as a form of stimulus in
better balanced economies, in Canada, our Harper-driven obsession with
becoming a petro-state has made lower oil prices the opposite for Canadians.
The next step in this economic contraction will be the death of the real
estate market in Canada, which was formerly driven in large part by the
legions of youthful home buyers as a result of a robust commodities weighted
economy, and annual immigration visas in the thousands. With China cracking
down on the spoils of government corruption (it has just
announced repatriation of 500 ‘economic fugitives’), at the same time as
thousands of oilfield workers are losing jobs, the outlook for the Canadian
real estate market is grim indeed.
How Long Will it Last?
Ah, the trillion dollar question. With the EU poised to launch its own
quantitative easing program, and Japan and China continuing apace, there will
be no abatement in the global expansion of capital and 8X credit. Each of
these other economies will be obliged to continue participating in US bond
auctions, if for no other reason than to safeguard the value of their own
currency, thus providing the U.S. a captive audience for what supposedly is
going to be the beginning of a balance sheet reduction by the Fed. But will
the Fed realistically raise interest rates and thus derail its own artificial
bull market? Or is it more likely that worsening economic conditions globally
will cause the U.S. to hold rates at rock bottom?
There aren’t many who believe that the
Fed will really be able to start raising rates without wrecking the stock
market. And since that market performance is the dominant barometer of
economic health among Fed and Economic Council ‘thinkers’, it is more likely
that the swoon that will come when they do try to raise rates will be
followed by a resumption of ZIRP, and maybe even renewed stimulus.
In any case, the lesson that we are
(theoretically) painstakingly learning is the stimulus does not actually
stimulate economic growth. Instead, the tier one institutions deploy stimulus
capital in synthetic derivatives bought and sold among the trillionaires club
at the top of the food chain, and only the crumbs that fall off of that table
are fought over by the broader economy. Without a government mandate to
deploy stimulus capital and its multiplied credit into all sectors of the
economy, the divergent living standards between top tier and bottom tier only
grow wider, with the middle segment growing smaller and incrementally being
moved to the bottom tier.
This, in my opinion, is driving
deflation across the real economies, and that deflation, which sucks the life
out of industries that require sustained investment, will continue until that
policy is changed. But since that will only happen in response to the
catastrophe that will certainly ensue upon recognition that there is nothing
left for more capital and credit to do, we have at least another few years of
this to look forward to.
That being said, our markets are now so
thoroughly controlled by an oligarchy of elite financial interests, that
there is no predicting what they might have up their sleeve.
