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


[Intro music]
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.

Stephen Childs

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