Monthly Commentaries

Summer Anecdotes and Observations – August, 2009

Despite this year's unusually cool and rainy weather, July and August are always great months to relax and socialize with friends and family. My summer included family celebrations in the US and Canada with an opportunity to commiserate with retirees and young professionals from across both countries about how they are weathering the financial turmoil and economic upheaval. Some interesting observations arose from these and other conversations. Banks remain reluctant to lend to small business. They will refinance the terms of an existing loan and call it a new loan to satisfy the "new lending" targets set by the Bank of Canada. Consistent with their aversion to risk, banks are escalating their mortgage lending and lines of credit against risk-free NHA insured residential property. Professionals and others employed by large institutions immune to a contracting economy can also qualify for sizeable home loans. For example, a newly qualified teacher in Ontario earning a modest salary easily obtained a $350,000 mortgage. Combined with the lowest interest rates in over 50 years, it's no wonder that a bidding war for houses has re-emerged in Toronto and other attractive cities, yet begs the question: What will happen when interest rates ultimately rise to more reasonable levels?

Trading patterns and volumes on most North American stock exchanges show that momentum trading has spiralled. Aside from institutional and hedge fund activity, many young entrepreneurs with time on their hands are trying to supplement their earnings with momentum-based trading strategies employing sophisticated software that are financed with a low cost line of credit against their homes. The casino society lives on - it's just that the players are now under-employed individuals rather than overly aggressive financial institutions. Retirees and well-to-do professionals were generally over-exposed to equities and either lost a bundle or lost somewhat less by moving a portion of their portfolios to cash. For the most part they have held onto their cash, earning minimal income and entirely missing the vigorous rebound in equity and bond prices since early March.

All have learned the expensive lesson that it's not the size of your portfolio that counts, but rather what your portfolio can do for you. Flooding the global economy with liquidity and artificially low interest rates has sustained leverage in certain segments of the economy while other areas languish from both a lack of financing and a lack of demand. The long, slow road to recovery is never smooth and will likely create new asset bubbles along the way. Let's hope they don't need tending anytime soon. Peter Sacks Managing Partner