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Bob Thompson: Understanding the debt cycle we are in and where it takes us

Who else is getting tired of talking about once-in-a-hundred-year events happening every year or so in the financial markets? It’s been over a decade of it now, and it all stems from the state of all things monetary, political, and where we are in th
Bob Thompson of Raymond James argues that the economy is bound to slow with so many interest rate increases. | Yuichiro Chino/Moment/Getty Images

Who else is getting tired of talking about once-in-a-hundred-year events happening every year or so in the financial markets? It’s been over a decade of it now, and it all stems from the state of all things monetary, political, and where we are in the debt cycle. There’s a lot to digest here, so this piece will tackle the big picture only, and we can look at more subjects as time goes on. 

Nowhere has been affected more by this global phenomenon than Vancouver, which has, in turn, squeezed the effects out to other parts of B.C. Whether it’s the surge of real estate prices here in Vancouver and its relation to the Cullen Commission findings or the heavy debt of the average consumer, there are a lot of things that have deviated significantly from the norm.

The financial crisis in 2008 was the result of excessive money printing in the early 2000s, which was due to the September 2001 events and also the recession caused by the excesses from the blow-up of the tech bubble. Of course, the final stages of the tech bubble were caused by a huge amount of liquidity from Y2K concerns, and from bailing out the system, which almost went down due to the long-term capital blow-up in 1998, which of course was caused by the Asian Contagion in 1997, and an extremely strong USD and excess liquidity.

In the 1980s, a huge amount of liquidity was pumped into the system because of the severe recession in the early 80s caused by lots of actions in the 70s, namely the ‘guns and butter’ approach to the economy. The excess money printing in the 80s and resulting boom helped cause the savings and loan crisis in the U.S. in the late 80s and the massive recession and real estate collapse here in Canada in the early 90s. By the way, if we think our banks are completely safe here in Canada, few remember that Royal Trust, a very large and one of the oldest trust companies in Canada, went under. I know because it’s the first stock I ever bought, and subsequently lost it all. In fact, the early 1990s was the last time we have had a normal credit cycle here in Canada. Normal credit cycles are a good thing as the system is cleaned out, the over-indebted go away, and the system is refreshed. With the current political climate here in Canada, and around the world, governments tend to bail out everything when serious problems arise, and of course, with that ‘we the people’ become more and more reliant on the government to sustain our lifestyles.  

Let’s get back to the 100-year events. These have really ramped up since 2008, as central banks attempt to prop everything up. Interest rates were at their lowest point in at least 1,000 years and bond yields had never been so low. Central banks were manipulating bond yields like it was a constant crisis, and we had government debt increases that were unimaginable. Unfortunately, we are getting to the point where the debt load and government spending is so far down the road that it can’t be stopped. The momentum is just too great.

The latest amount of money printing, quantitative easing, and other non-traditional approaches have finally created inflation that seemingly no one in authority saw coming.   Policy-makers and central banks are now in a position where they are completely backed into a corner due to all the pushing and prodding they have done to interest rates, the market, and money supply. It makes you wonder: what if they just didn’t try to manage things so much and left the markets to their own devices, as far as interest rates and other factors go? I strongly suspect we would not have had the fantastic booms and earth-shattering busts that we have seen for so long now. 

Where do we go from here? I find it hard to believe that when interest rates go up hundreds of percent, from one per cent to five per cent in less than a year, that the economy will continue to grow. To put it into perspective, on a percentage basis, it’s similar to rates going from four per cent to 20 per cent in a year, all when two years ago, central bankers said we would be in low interest rate environment for the foreseeable future. I fear we will be talking in a few months with the economy in a deep recession, unless of course governments find another way to bail out the system. 

We gave a brief history primer this week, but in the future, we can discuss where we go and what areas of the economy and the market can shine. Hint, if I were to peg a year in history that we are closely mirroring right now, it would be 2001.

Bob Thompson is a Senior Portfolio Manager with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. This article is for information only. Raymond James Ltd. is a Member of Canadian Investment Protection fund.