The Three Most Dangerous Things This Morning

This week three big issues are defining the financial landscape

Greece Isn’t Done Yet!

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Despite a no vote in Greece over the weekend, the EU still believes it is within the collected interest within the Eurozone to stop Greece from imploding. Strong resistence seems to be coming from Greece on this issue as the Greek Prime Minister, Alexis Tsipras, swanned into Brussels with Cheshire cat grin and nothing in hand to negotiate with. Greece has five days to work out a plan with its creditors before being declared in default. While the Greek situation seems to be playing out at a glacial pace, the fact is that these tactics can only go on for so long, and eventually (presumably by the end of the week) a point of no return will be passed and negotiations will be moot. The stakes are high as a Greek default, while not insurmountable by European leaders, risks creating problems in other member states. That contagion is at the heart of German reluctance to cut Greece any slack and it is the real concern that is adding volatility to the market. Markets would like to see a sensible conclusion to the Greek problem since it will reassure everyone that the larger plan for Europe is still in place. A chaotic Greek exit from the euro could simply make matters worse.

China: Start Panicking and Throw Things!

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Ghost CitiesFor years people have scratched their heads at the curious case of China. China’s economy is huge and somewhat a mystery. Like most big economies, the government makes predictions about the future of economic growth. Unlike most big economies those predictions are always right and never need any revision. In addition to China’s always correct economic growth numbers, China has embarked on massive infrastructure projects. So massive that they’ve built entire cities where no one lives. This combination of big spending and highly suspect numbers has made many people wonder whether there is a looming problem within China that has yet to rear its head.

That problem may have arrived this month. The Chinese stock market has lost close to 40% over the last month and the government has had to step in to try and stop the collapse. So far that hasn’t worked. Prices in China have surged over the last few years as many smaller investors have not just placed money in the market, but borrowed to do it as well. While there were rules to stop “leveraged market mania” within the Chinese market, like all rules they were both weakened over time and people have found ways around them (you can read more about that in this May report: Credit Suisse Report on Chinese Leverage).

China has a market bubble and it’s in the process of deflating. Just this spring 20 million people opened stock accounts, while whole towns have given up farming so that they can play the markets. The Chinese government isn’t oblivious to this problem, and has taken extreme action to try an prop up the market, but whether that will work has yet to be seen. Meanwhile concerns that the market is collapsing is driving many investors to sell, exacerbating the situation.

Canada in Recession? What’s a Recession?

bocCanada’s economic situation is…unclear. At least, that’s the best case scenario. The regular reports from the Bank of Canada, The Financial Systems Review, which details risks within the Canadian market and has regularly highlighted that the indebtedness of Canadians poses the single greatest risk to the economy. If the economy were to change in any way that made servicing those debts impossible the effect would be serious. Since the December report, the Bank of Canada had made an unexpected rate cut to help prop up the economy which was being affected by the falling price of oil. The June FSR (which you can read HERE) stated the same thing, but hoped that an improving American economy would also float Canada’s economic boat. But shortly after publishing several things went wrong. It was revealed that the Canadian economy had contracted four months in a row, with the last month coming as a complete surprise to the BoC. Today, news got worse that Canada has had a record trade deficit, and combined with other bad news gives weight to the likelihood that Canada is already in recession. While this will add pressure for a rate cut, the real message here is that the Canadian market is far more dangerous and volatile than many investors think. That’s something that Canadians reviewing their portfolios should be highly aware of as they consider their retirement nest eggs.

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