February 7

QOTD1:
Faced with the choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

QOTD2:
People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome. ~ George Orwell


Canadian corporate bonds an expensive proposition. FP.
according to PIMCO's Ed Devlin.

“The fundamental problem with the Canadian corporate bond market is that there is are too many investors chasing too few issuers,” Mr. Devlin said in a recent note to clients.

He noted that 59% of Canada’s main corporate bond benchmark is concentrated in just 10 issuers. By comparison the percentage of the index concentrated in 10 issuers is 20% in the U.S., 26% in Great Britain and 35% in the Eurozone.

Housing prices to drop 25%, [Capital Economics] forecaster predicts. The Star.

Negative annualized stock market returns for the next 10 years or longer? It's far more likely than you think. Mish.

Entranced by China's bubbling economy. Edward Chancellor, FT.

Mr Mansharamani starts out with George Soros’s theory of reflexivity.... markets are determined by a “two-way feedback mechanism in which reality helps shape the participants’ thinking process and the participants’ thinking helps shape reality”. Chaos rules as errors of perception feed back into reality.

The financial instability hypothesis of the late Hyman Minsky complements Mr Soros’s reflexivity.... already inflated asset prices can only be sustained by further price appreciation and ever increasing leverage. 

According to Mr Minsky, when Ponzi finance is widespread, the economy is likely to develop into a “deviation-amplifying system”. All great bubbles have easy money and growing leverage. Mr Mansharamani turns to Friedrich Hayek and the Austrian economists to show how inappropriately low interest rates fuel credit growth and over-investment.

Behavioural psychology also helps explain why bubbles develop. Humans have a chronic tendency to overconfidence. We underestimate the probability of events that we haven’t recently experienced... For instance,...  it was generally believed house prices could not fall because they had been on a continuously rising trend in earlier decades.

Mr Mansharamani surveys recent research into swarm behaviour in the insect world. While ants lay and follow trails of pheromone, the speculative crowd follows a trail of recently minted money. Politics provides yet another prism for identifying bubbles. Great speculative booms are often stimulated by governments, sometimes with the intent of lining the pockets of public officials. All bubbles are accompanied by fraud.

China today has the characteristics of a truly great bubble. The value of the housing stock is set to exceed 350 per cent of GDP this year... Construction accounts for around one-quarter of economic activity in China...

A reflexive process appears to be at work as the anticipation of future Chinese economic growth drives new construction, while new construction drives economic growth.

Ponzi finance proliferates in China. Wasteful infrastructure projects are funded with bank loans and land grants from local governments, which themselves depend on land sales for the bulk of their income. Chinese banks bypass credit restrictions by securitising loans to developers, while state-owned enterprises boost profits by dabbling in real estate. China’s financial system has become in Mr Minsky’s phrase a “deviation-amplifying system”.