Magical Asset Inflation

Steve Saretsky -

Canadians continue to plow money into the Real Estate market. According to Stats Canada, Gross residential investment surged to an unprecedented $160.2 billion in the third quarter, almost 9% more than the previous quarterly record of $147.5 billion at the end of 2017. Per a recent article from the Financial Post, housing accounted for 37% of overall investment, while business spending on machinery and equipment and intellectual property dropped to 28.2%, the highest and lowest levels, respectively, since early 1993.

These figures are symptomatic of an economy on life support, drowning in a sea of debt. Why start a business when you can get rich by purchasing a condo or two? The pandemic has only re-enforced these perceptions. Look around you and businesses are suffering while house prices continue to surge higher. Magical asset inflation is slowly eroding societies confidence in our institutions.

While policy makers are avoiding discussing the elephant in the room, a recent interview from former Prime Minister Stephen Harper says it all. In case you missed it, Stephen Harper did an hour long podcast with Cambridge House, a Canadian investment firm. While his comments are nothing new to people paying attention in the finance space, they are still astonishing to hear when you consider he is not far removed from his role as prime minister.

When Harper was asked about his views on the current froth building in financial markets, Harper responded:

“First of all, it’s important to understand what is occurring now because we constantly hear there is all this injection of liquidity through low interest rates, quantitative easing, in the case of the Bank of Canada, actual creation of cash, and yet people say, “But we don’t have inflation.” Well, that is not true. We have massive inflation. It’s asset inflation. We already have an inflation problem, and I am concerned. I’ve been very frank with you about this. I’m very concerned that we have bubbles everywhere in real estate and stock markets, you name it.”

Harper continues,

“The Fed and other Central Bank balance sheets have not just been buying government securities or their own securities. They’ve been buying the security of other governments in Canada. It’s been unprecedented what the Bank of Canada’s done. It’s bought provincial securities, initially, because the government of Newfoundland and Labrador was on the verge of bankruptcy. It’s bought corporate securities at an unprecedented level.

So, we’ve got an enormous, I think we’ve just got enormous bubbles and we’ve got a debt overhang, whether it’s government, I say corporate, or household, that it is hard to see how there could be … how that could be unwound in a meaningful way.

So, as I say, I think you’re going to have crises and when you have those crises, governments will be confronted with a series of options. None of which are very good, but there will be austerity. Austerity is, people complain about austerity, but austerity is rarely done as a choice. Austerity is usually done because markets will not lend you the amount of money you want to borrow and there will be governments that hit that wall … As COVID-19 begins to pass and some economies, major economies, begin to recover, there will be governments that cannot borrow the amount of money they want to borrow. They simply will be unable.

They will have a financial crisis and their choices will be a combination of austerity, devaluation and default, or frankly, general inflation, and so I think you’ll see in different markets combinations of these things. The big question is the United States. How long will the world loan trillions of dollars at 0% to the United States? Right now, I would say to you that in the short to mid term, the market appears willing to do that, but it’s not going to do it for everybody in the world.”

Yes, Harper believes a debt crisis is looming. If you can keep your political views aside, I think there is an important message here. It’s amazing what you can say when you’re no longer shackled to the chair as Prime Minister.

Three Things I’m Watching:

1. Residential investment continues to outpace investment in machinery, equipment and intellectual property. (Source Financial Post)

2. Gross domestic product expanded 0.7% in November from a month earlier, Statistics Canada reported Friday in Ottawa, topping the 0.4% forecast of economists in a Bloomberg survey. (Source Bloomberg)

3. Distressed home sales in the United States fell to a 15 year low in 2020. (Source Attom Data Solutions)

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The Saretsky Report. December 2022