How to undo a tangled web

Financial trends illustrate the forces at work in the economic world. Behavioural finance analyst Ken Norquay wonders how this tangled web will unwind.

“It’s like déjà vu all over again,” baseball’s famous philosopher, Yogi Berra, once quipped.

This time it’s real estate all over again. Ages ago, the 2008-9 stock market crash was preceded by (caused by?) a mortgage/real estate collapse in the USA and parts of Europe. Now, China’s biggest real estate companies are defaulting on their foreign bond debts. I wonder how similar today’s Chinese bond default predicament is to the 2008 predicament, when US mortgage backed securities were unable to make their interest payments. I wonder how many Western banks own these Chinese real estate bonds that are now in default. The banking crisis circa 2010 was triggered by the collapse in price of mortgage-backed securities. Now Chinese real estate bonds are collapsing in price. It’s uncanny, but Yogi Berra’s famous quip rings true these days.

A number of financial reporters on this topic asked analysts and portfolio managers about their holdings of these default bonds. They all said the same thing: portfolio managers all expect the Chinese government to step in and fix it . . . just like Federal Reserve Board Chairman Powell did on the Ides of March 2020 when the FED started aggressively printing money. But the Chinese government is facing the same problem as Western economies—rising inflation caused by aggressive monetary policy. What more can they do? Will they print money even faster? Will they guarantee the default bonds? How can the Chinese government help?

This time it’s different

Bad news! There is another, less optimistic rumour floating out there in financial never-never land. This rumour holds that the Chinese government is already fixing things: that they had instructed the giant real estate developers to use their sparse cash flow to complete on-going construction projects and NOT to pay interest to foreign bond holders. The Chinese government is looking after China, not foreign bond holders.

It’s a mistake to pretend to know what China will do. Our job is to manage our own finances for the well-being of our families. We don’t have to guess how the Chinese or anyone else will manage their mega financial problems. We need to have a well-thought-out backup investment plan to protect our personal portfolios when the inevitable bearish market jolts eventually set in. In this sense, we have a big advantage over large institutional money managers. We can sell out and wait it out. They can’t. Their collective selling is what causes bear markets. Our personal selling is merely a drop in the bucket. Because they are so very big, they need to pretend to know what they do not know. They need to spin ‘feel-good’ economic stories in order to motivate buyers for the securities they are trying to sell. For example, the money managers who own loads of China Evergrande real estate bonds need to remain optimistic and up-beat so they can sell some bonds to speculative investors who might be attracted to the high yields offered by these low-quality bonds. Their optimism is well placed, spoken to create buyers for their D-grade bonds.

Let’s review our usual financial trends from the point of view of what we know and what we don’t know. Are there any other ‘déjà vu’s out there?

US Stock Market. We know that on March 9, 2009, the S&P500 hit an inter-day low of 666. In late October 2021 it registered around 4,545—a 682 per cent rise in 12.6 years. We also know that FED monetary policy during the entire 12.6 years has varied between easy (QE1, QE2, QE3) and super-easy (the FED aggressively printing ‘as much as it takes’). We also know that, during those 12.6 years, the rate of appreciation of the stock market has been increasing. This phenomenon is called ‘going parabolic’ and is a reliable indicator of massive speculation in the US stock market. The long-term trend is still up. We know a top is close; but we don’t know when it will come.

Canadian Stock Market. The low for the TSX Composite Index was 7,567 on March 9, 2009. In late October 2021, it registered 21,258—a 280 per cent gain over 12.6 years. Although the TSX has gone straight up during the Bank of Canada’s current money-printing binge, it pales when compared to the US market’s excesses. It has not gone parabolic. The long-term trend is up. The yellow caution light is ON.

US Bond Market. (Measured by iShares 20 Plus Year Treasury Bond ETF (NASDAQ—TLT), the ETF for long term US treasury bonds.) The low for US long-term interest rates (i.e., the top of the bond market) occurred in summer 2020, about four months after the FED’s Ides of March announcement that they would print “as much money as it takes,” to avoid a recession. The 2020 bond market top ended a bull market that began in November 1981, 39 years earlier. Interest rates are now in an uptrend: bond prices are in a long-term down trend. The FED’s plan was to flood the economy with money to prevent a credit crunch/recession—and it worked! In 2020, the economy collapsed, then recovered. Well . . . it worked for four months. But since then, even though the FED was aggressively buying long term bonds, their prices went down. This we know. Does that mean the FED’s printing press was effective until the summer 2020 bond market top? From then on, the money that flooded from the FED’s printing press created inflation in house prices and the stock market. Because of this excessive money printing, the economy has held its own and overall inflation is increasing steadily. But house prices and the stock market have soared! By solving the last crisis, the FED has created the next one.

Canadian Bond Market. (Measured by iShares Core Canadian Long Term Bond Index ETF (TSX—XLB), the ETF representing long term Canadian bonds and debentures.) The Canadian bond market is dancing to the same music as the US and the same analysis applies. Canadian bonds are also in a long-term down trend. Interest rates are in a long term uptrend. This is what we know based on a simple reading of the statistics. But investors may not know if they should be optimistic or pessimistic. Optimists think: “Inflation is heating up. Canada loves mild inflation. Good times and a rising stock market lie ahead.” Pessimists respond: “Except for house prices and the stock market, the good times have passed. Higher inflation means higher interest rates.”

US Dollar vs. a basket of non-US currencies. We know that the USD has been in a sideways trading range since 2015. It had risen to the top of that range after the 2020 mini-crisis. Over the next nine months, it slid slowly down to the bottom. It has lapsed into a short-term sideways range for the last 14 months. The long-term and short-term trends are neutral.

Canadian Dollar vs. US Dollar. We also know that the loonie has been drifting sideways since 2015. The highs have been just over 80 US cents; the lows around 72 US cents. The long-term trend is neutral. What we don’t know is how long this currency stability will continue. And, really—do we care?

Energy Prices. Oil’s short-term uptrend dates to the spring 2020 reversal, when oil futures actually traded at a negative value for a brief time. Since then, fuelled by easy money policy, oil has slowly inched higher. The short-term trend is up.

Gold. We know the current long-term uptrend began in 2015, with gold just over $1,000 per ounce. It had almost doubled by August 2020, when it shifted into a short-term down trend. That down trend ended nine months ago. Gold is now drifting sideways. This is a good opportunity for conservative investors to accumulate gold and silver ETFs, mutual funds, coins or bullion.

We don’t know how this tangled web will unwind. These financial trends illustrate the forces at work in the economic world. But Chinese real estate problems lie outside the control of the FED and the other central banks of western countries. We know how real estate owners in the West have to behave when they can’t make their debt payments. They have to put a ‘for sale’ sign on the lawn. That’s what happened in 2007-10: foreclosures and powers of sale. I wonder if they have the same laws in China.

Or maybe the Chinese government will instruct Chinese off-shore real estate investors to put ‘for sale’ signs on the empty houses they own in Vancouver?

Ken Norquay, CMT, is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: behavioural finance. He can be reached at

This is an edited version of an article that was originally published for subscribers in the November 2021, First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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