I present the counter Chart of the Day. Resource-rich Canada has benefited from the growth of China and other emerging markets. This growth combined with an easy money policy has created a housing bubble. In fact, Canadian housing prices surpassed the greatest extent of the American housing bubble over two years ago and have continued rising.
The drop in Canada’s consumer credit is not good news. It is a sign that the housing bubble is bursting. Canadians have ceased taking out large mortgages to buy homes. We are about to discover how strong Canada’s banking system really is.
Germany leads Europe in new car production but purchases less than half its own wares. The country produces about 6 million new cars annually and buys less than 3 million. The euro is a weaker currency than Germany deserves based on productivity. This helps German exports, but it also robs the people of purchasing power. The flipside to an export friendly currency is reduced living standards for the country. Perhaps, even Germany would benefit from a euro breakup.
By purchasing bonds, the Bank of Japan wanted to increase the amount of cash available for loans. Just by jawboning alone, loans to the private sector rose from the fall to the spring. When the plan was announced and implemented in April, loan creation reversed its positive trend as detailed in the chart. Banks have plenty of cash and have determined that loaning the money to the Japanese government at less than 1% is the best use of the extra funds. The dearth of good lending opportunities speaks volumes about the true health of the Japanese economy.
Since the beginning of the bull market in March of 2009, the average hedge fund has risen 21% compared with a rise of 77% in the S&P 500 through May of 2013. Less than 5% of the funds are able to match the return of the S&P 500 or even the average mutual fund. As wealthy investors flee the sector, what are these banker to do to keep the gravy train rolling? The answer is to figure out a way to sell these funds to retail investors. The smart money may only leave if the dumb money takes its place.
Greece and the troika are playing chicken again. Greece is not reforming rapidly enough the troika, so it is threatening to hold back the next bailout tranche. What makes this game of chicken more interesting than usual is that the Greek banks have yet to be recapitalized since the 3rd Bailout was agreed to last fall. This sets up a “depositor haircut” à la Cyprus to keep the bailout on track prior to German elections.
There is no way that Greece will receive any more money from the troika with German elections looming, but Greece cannot be allowed to collapse either. The solution is a raid of Greek depositors. This is why Cypriot banking assets were transferred to the Greek system as part of the Cyprus Bailout in April, so that the funds for the raid would be available. If you think that this is too cynical for even the troika, then you have not been paying attention to the eurocrisis.
The yen had been stuck below 100 until today. Decent economic data is given as the reason for the move above the psychologically important level. Whenever the yen gets too weak, the demand for yen based loans drives the price up again. I believe that it will be very difficult for the yen to weaken beyond 105 in light of this dynamic.