Mark Carney speech highlights

In honour of our great Canadian central banker that is taking off to London, I thought I would highlight parts of his speeches. Carney understands global deleveraging more than most other central bankers, quoting Minsky along the way. He also understands that Canadians will one day have to go through this process as well….

Quotes from: Growth in the age of deleveraging

“Most fundamentally, current events mark a rupture. Advanced economies have steadily increased leverage for decades. That era is now decisively over. The direction may be clear, but the magnitude and abruptness of the process are not. It could be long and orderly or it could be sharp and chaotic. How we manage it will do much to determine our relative prosperity.”

“In general, the more that households and governments drive leverage, the less the productive capacity of the economy expands, and, the less sustainable the overall debt burden ultimately is.

“Another general lesson is that excessive private debts usually end up in the public sector one way or another. Private defaults often mean public rescues of banking sectors; recessions fed by deleveraging usually prompt expansionary fiscal policies. This means that the public debt of most advanced economies can be expected to rise above the 90 per cent threshold historically associated with slower economic growth.”

“While debt can fuel asset bubbles, it endures long after they have popped. It has to be rolled over, although markets are not always there. It can be spun into webs within the financial sector, to be unravelled during panics by their thinnest threads. In short, the central relationship between debt and financial stability means that too much of the former can result abruptly in too little of the latter. Hard experience has made it clear that financial markets are inherently subject to cycles of boom and bust and cannot always be relied upon to get debt levels right. This is part of the rationale for micro- and macroprudential regulation. ”

“As a result of deleveraging, the global economy risks entering a prolonged period of deficient demand. If mishandled, it could lead to debt deflation and disorderly defaults, potentially triggering large transfers of wealth and social unrest.”

“Austerity is a necessary condition for rebalancing, but it is seldom sufficient. There are really only three options to reduce debt: restructuring, inflation and

“Once leverage is high in one sector or region, it is very hard to reduce it without at least temporarily increasing it elsewhere.

In recent years, large fiscal expansions in the crisis economies have helped to sustain aggregate demand in the face of private deleveraging (Chart 8). However, the window for such Augustinian policy is rapidly closing. Few except the United States, by dint of its reserve currency status, can maintain it for much longer. “

Source: Growth in the age of deleveraging

“This will be hard to accomplish without co-operation. Major advanced economies with deficient demand cannot consolidate their fiscal positions and boost household savings without support from increased foreign demand. Meanwhile, emerging markets, seeing their growth decelerate because of sagging demand in advanced countries, are reluctant to abandon a strategy that has served them so well in the past, and are refusing to let their exchange rates materially adjust.”

What It Means for Canada

Canada has distinguished itself through the debt super cycle (Chart 10), though there are some recent trends that bear watching. Over the past twenty years, our non-financial debt increased less than any other G-7 country. In particular, government indebtedness fell sharply, and corporate leverage is currently at a record low (Chart 11). “

Source: Growth in the age of deleveraging

“In the run-up to the crisis, Canada’s historically large reliance on foreign financing was also reduced to such an extent that our net external indebtedness was virtually eliminated.

Over the same period, Canadian households increased their borrowing significantly. Canadians have now collectively run a net financial deficit for more than a decade, in effect, demanding funds from the rest of the economy, rather than providing them, as had been the case since the Leafs last won the Cup. ”

” Unlike many others, we still have a risk-free rate and a well-functioning financial system to support our economy. ”

“First and foremost, that means reducing our economy’s reliance on debt-fuelled household expenditures. To this end, since 2008, the federal government has taken a series of prudent and timely measures to tighten mortgage insurance requirements in order to support the long-term stability of the Canadian housing market. Banks are also raising capital to comply with new regulations. Canadian authorities are co-operating closely and will continue to monitor the financial situation of the household sector.

To eliminate the household sector’s net financial deficit would leave a noticeable gap in the economy. Canadian households would need to reduce their net financing needs by about $37 billion per year, in aggregate. To compensate for such a reduction over two years could require an additional 3 percentage points of export growth, 4 percentage points of government spending growth or
7 percentage points of business investment growth. Any of these, in isolation, would be a tall order. Export markets will remain challenging. Government cannot be expected to fill the gap on a sustained basis.

But Canadian companies, with their balance sheets in historically rude health, have the means to act—and the incentives. Canadian firms should recognize four realities: they are not as productive as they could be; they are under-exposed to fast-growing emerging markets; those in the commodity sector can expect relatively elevated prices for some time; and they can all benefit from one of the most resilient financial systems in the world. In a world where deleveraging holds back demand in our traditional foreign markets, the imperative is for Canadian companies to invest in improving their productivity and to access fast- growing emerging markets.”

“Today, our demographics have turned, our productivity growth has slowed and the world is undergoing a competitive deleveraging.

We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.

It is better to rebalance now from a position of strength; to build the competitiveness and prosperity worthy of our nation. ”


I thought it would be good to look at the private household sector debt chart from the last post.

In short, Carney knows Canada is at risk despite its fiscal prudence and low corporate debt because the household private sector has accumulated leverage due to overconsumption. Carney would like Canada to avoid the situation where the public sector takes over the gap in aggregate demand caused by deleveraging and thus asks the corporate sector to step up. Exporting our way out of this isn’t an option as there is a game of competitive devaluation going on worldwide. Unfavourable demographics also come into play as a drag. Having said all this, Canada is still relatively in a better position although they haven’t even begun the deleveraging process and are therefore 3-4 years behind the game.

Carney also mentions that Canada still has a ‘risk-free rate’ which is a great point. The US has reached its zero-bound for interest rates, and as a result its economic cycle is closely related to trends in inflation. As Francois Trahan of Wolfe Trahan & Co. insists that “inflation is the new fed funds rate,”. In Canada we still have some maneuvering room

Technician Stan Weinstein on FSN

Stan Weinstein is a legendary investor due to many successful market calls as well as his book Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets in which he explains his framework known as staging analysis. It was great to hear him on the Financial Sense Newshour being interviewed by Jim Puplava. Check out the interview.

In case you wanted to know more about Stan’s staging analysis, check out his book. It is also pictured below:

It was also good to see Chris Puplava extend the staging analysis model to try and time the market and visualize sector rotation. A very interesting timing model.

Source: Chris Puplava

Great macro slides by David Rosenberg

I wanted to highlight these great macro slides by David Rosenberg of Gluskin Sheff via Business Insider

This presentation was posted a month ago but I am highlighting some very long term trends/processes.

The private household sector is in a deleveraging cycle that is likely to persist for many more years until debts return to pre-bubble era levels and the result is a tremendous drag on growth. A generational process of increasing risk-taking and debt-accumulation has come to an end for at least a decade. Below you can see the collapse in housing prices and also the lack of credit creation.



A good way to figure out where we are in this deleveraging cycle is to normalize the household debt levels to put them in context. In the slide below you can see debt compared to assets and income. Both comparisons are relevant because assets reflect a ‘stocks’ type comparison and income a ‘flow’ type comparison to debt, which is itself a ‘stock’ (ie stocks to flow ratio).



Demographics are unfavourable for asset prices in general as baby boomers transition from their asset accumulation to asset liquidation stages of their life to fund their (underfunded) retirement. While the trend will almost certainly dampen asset prices in general, there will be themes that are winners (income and dividend related plays come to mind) and losers.


In a private sector deleveraging cycle, economic cycles are shaped in a large part due to fiscal stimulus, monetary intervention and exogenous events/announcements because the government sector is attempting to make up for a lack of demand from the private sector deleveraging and policymakers are trying to influence market expectations.


The timing of the most recent intervention announcing ‘unlimited’ Quantitative Easing is very ill-timed. Rosenberg mentions that this is done at a time when inflation expectations are high, and he is correct. Inflation expectations also follow the business cycle, so Bernanke effectively made this announcement while the business cycle was underway and maturing vs earlier announcements that were made nearing the trough of the business cycle, supporting asset prices when it was needed. My guess is the Fed is worried about unemployment levels and had to act to try ameliorate the situation. Will the ‘unlimited QE’ announcement mark the high in this equity cycle? Only time will tell….


This slide is not from the David Rosenberg presentation but I thought I would turn the discussion to home. Canada is the last remaining developed country to start private household deleveraging. Is this time different? Or are we just 3-4 years behind the deleveraging process of other developed nations set to go through the same process. Hopefully the rest of the world recovers and we can use our exports to make up the gap between potential and actual growth instead of levearging up our public sector to counteract the loss of growth, like Japan did for much of its period of stagnation until recently. Unfortunately I think even this optimistic scenario would be several years away.


Visualizing DeMark indicators in Matlab

The intrigue of a friend and the MTA article of James Brodie led me to a closer examination of the profitablility of DeMark counts

I can’t believe how easy it has gotten to load data from yahoo into matlab and run tests. Choosing from daily, weekly or monthly data sources allows for a multiple time frame look at the profitability of DeMark. I won’t reveal any secrets (stats) in this post, but simply post the visualizations I was able to create and some thoughts on further testing. Below you can see TDST (Tom DeMark Setup Trend) initiation point (for a buy this would be C[] > C[-4] AND C[-1] C[-4]. It certainly marks some interesting points in the market.

Here we can picture the full TD sequential setup with its countup:


Source: Impressive Signals from DeMark

In my own analysis you can visually see where the initiation and profit taking points are for the Weekly and Monthly time frames:

Weekly DeMark:

Monthly DeMark:

Some additional thoughts:
– How sensitive is the whole system to the bar count in the TD Price Flip?
– Should we store all counts and use PercentRank to optimize the target profit taking level instead of relying on 9’s and 13’s?
– Test different thresholds for Close > CLose[-4] rule for the count. Why 4 bars? Why not greater than previous lows or lower than previous highs?
– Instead of Daily/Weekly/Monthly multiple time frame analysis why not use Kase Synthetic Rolling bars to test various loopbacks?

Unfortunately we only have so much time to test, but it would be interesting to see the results from tests likes these

4 more years….

Barack Obama was elected to his second term last night. I was a bit relieved just because I thought Romney’s pro-austerity stance puts the whole country at risk since the private household sector is in an ongoing deleveraging, and both the government and households can’t cut back at the same time without a serious reduction in growth. Who knows what promises he would have followed through on…

ObamaProbably a far more important leadership change that currently not as followed in the media is the change in China. Watch closely as there could many repercussions to this change…..

China1China’s political process 1

China’s political process 2

On the Brink of Global Recession?

Interesting post and graphics by Dwaine Van Vuuren over at FinancialSense:

Global Recession?

“The Global Economy is on the brink of a recession with 58% of 29 OECD countries experiencing business cycle contractions. The chart below shows OECD defined global contractions (grey shaded areas) together with the percentage of 29 OECD member countries experiencing slowdowns. It is evident that whenever 50% or more of countries enter contraction (red dotted line) that the odds of global recession are very high.


The conclusion is that the world economies are in a precarious state but many are making soft landings and the % of countries in recession seems to have peaked. There is cause for concern for contagion to the U.S which means we must watch world economy status and the U.S recession models from our Recession Forecast Ensemble even closer for faintest signs of weakness. A fall into recession in the U.S is likely to be a very rapid one if it occurs against the current world backdrop. Getting out the stock market too soon can be very costly, as has been the case over the last 13 months since ECRI’s first recession call. For this reason we are not hitting any panic buttons on our side just yet.”

The big question is whether or not the world economies are bottoming out or if this is only the beginning. The best phase of the business cycle to invest is when leading indicators are bottoming out, as pictured in the framework below by Wolfe Trahan. Will a shock derail this bottom? Or will we experience a global recovery finally? Only time will tell, but I would be watching cues from the Shanghai Composite, Emerging market relative strength and base metals.

lei framework

Source: Wolfe Trahan