This week’s edition is a joint effort between me and Sam. I’m still enjoying the pleasures of La Belle Province and will be on the road to Kamouraska on Thursday.
It has not been a good week on the markets. Equity markets have sold off sharply while bond yields have climbed a bit from the lows of last week. Cryptocurrencies were also hit with Bitcoin hitting a near-time low of $54,369 on August 5th from a high of $73,157 in March. While there have been some intra-day rallies in the equity and crypto markets, none have held. We are not through this yet.
| Index | Close Aug 1st 2024 | Close Aug 8th 2024 |
| S&P500 | 5,447 | 5,332.73 |
| TSX60 | 22,723 | 22,226 |
| Canada 10 yr. Bond Yield | 3.07% | 3.20% |
| US 10 yr. Treasury Yield | 3.93% | 3.98% |
| USD/CAD | $1.38852 | $1.37284 |
| Brent Crude | $79.52 | $76.401 |
| Gold | $2,446 | $2,422 |
| Bitcoin | $65,231 | $61,309 |
Source: Trading Economics & Factset
Every market sell-off has several factors that lead to it. The most common are over-valuations of assets and too much leverage. Those conditions can remain in place while waiting for a catalyst to send prices tumbling. While markets can be efficient (or so the theory goes) they are not necessarily rational. It is what makes it tough for contrarians. In the words of John Maynard Keynes, “Markets can remain irrational far longer than you or I can remain solvent.”
In the present case, we have stretched valuations, especially in the technology sector which have been ignored (and celebrated) for months. Leverage is always present, and, in this case, it is directly linked to the catalyst that started the current route. In the 2008/9 financial crisis, the problem was over-leverage (borrowing) which became a house of cards that collapsed with the demise of Lehman Bros. This time, it is not so much the amount of leverage but the source of borrowed funds.
For years, hedge funds (and others) have taken advantage of ultra-low interest rates in Japan to borrow in Yen and invest in US dollar assets. Referred to as the Japanese Yen Carry Trade, this spread in rates was a steady and dependable source of alpha (excess return over the market). Like turkeys, who ignore the approach of Christmas, traders ignored an increasingly hawkish Bank of Japan which raised interest rates last Wednesday and announced plans to reduce quantitative easing. That combined with signs of a slowing US economy was enough to cause a rush to the exits.
So, high valuations, the prospect of a slowing economy, and leverage all lead to what some would argue was a needed correction. Will it lead to a bear market? We don’t know but we do know that we will see lots of headlines saying it will. Bad news sells. We have been positioning portfolios ahead of this with the introduction of more “alternative investments” that are not as closely correlated to the markets and by selling some overvalued positions. We will continue to make changes as things evolve.
One final word on “carry trades”. While in this context they may sound exotic and risky, they are the very foundation of our banking system. Banks borrow money at low(er) rates (aka deposits) and lend it out at high(er) rates. This spread between rates is the “carry” or net interest margin.
Now…. Over to you Sam….
Here at home, the Bank of Canada released its report on the recent rate cuts in July. The report highlighted concerns about slack in the labor market, which could exert downward pressure on growth. While the bank remains hopeful for a rebound in consumer spending and potential further rate cuts, officials acknowledged significant risks. They pointed out that upcoming mortgage renewals and ongoing weakness in the labour market,” could further suppress growth and lead to more persistent inflation than anticipated.
Just across the border, the election continues to heat up. Kamala Harris has selected Tim Walz, the Governor of Minnesota, as her Vice President and running mate. Many Democrats and even some Republicans have applauded her choice, which stands in stark contrast to Trump’s announcement of his running mate, J.D. Vance. After previously refusing to debate Kamala Harris, Donald Trump has now agreed to a debate on September 10th on ABC.
After declaring bankruptcy and seeing its former CEO sentenced to 25 years in prison for fraud, FTX has been ordered by the courts to return $12.7 billion to its customers. This repayment will fully compensate creditors based on the value of their accounts at the time of FTX’s bankruptcy filing.
European gas prices have surged to their highest level in 2024 due to ongoing conflict at the Ukraine-Russia border. Ukraine reportedly seized a crucial gas transit point near the Russian border, one of the last remaining pipeline links to Europe. Despite Europe’s efforts to reduce its gas imports from Russia, the reliance remains a significant issue for countries like Slovakia and Austria, which would be most affected by a halt in gas flows.
As the Paris 2024 Olympics draw to a close this week, Canada has added a few more medals to its tally. Island athletes Keleigh Filmer and Avalon Wasteneys secured a silver medal in the women’s eight-rowing event. Additionally, Nanaimo’s own Ethan Katzburg clinched a gold medal in hammer throwing. To bid farewell to the Canadian athletes and the Olympics, I leave you with the iconic song from the Vancouver 2010 Olympics.
Russ Lazaruk, RIAC, CIWM, CIM, FCSI
Managing Director & Portfolio Manager
