Coxe on the Real Estate Bubble
If you’re not familiar with Don Coxe, he is a respected Canadian money manager with 35 years of experience as an institutional investor. He is an outspoken commodity bull and noted inflationist.
The latest instalment of the Coxe Strategy Journal offers up some interesting perspectives on the global economy and the Canadian housing market. The bulk of the article discusses the ongoing Euro debt fiasco in great detail. It is all an interesting read, but I’ll only highlight a handful of quotes. Hat tip to DR for the link.
“Big Canadian banks remain far less risky and better-managed than their American counterparts. However, Canada continues to experience a real estate bubble, and despite banks’ assurances that they aren’t at risk, when the bubble does burst, foreign investors will probably sell bank shares first and ask questions later.” -Pg. 42
This has been my concern with the big banks. I’m not against owning preferred or common shares in the banks as long as it is in a retirement portfolio with a long time horizon. I do think there are far more intriguing opportunities than the big banks right now, but if you have a love affair with them, knock your socks off.
What I absolutely do NOT recommend is holding bank shares, be they preferred or common, in an account that is designated as a down payment or house fund. There is absolutely no way to guarantee the safety of your investment over a short time horizon of less than 5 years and it is highly likely that when the housing market does move downwards, it will put similar downward pressure on bank stocks as their unsecured debt will see rising default rates while weak domestic credit demand cuts into profits. This would be exactly when you would want to have a nice, chunky wad of capital with which to go vulching. Beware! Back to Mr. Coxe.
“That real estate bubble is one reason for caution on the Canadian currency. Although it remains fundamentally more attractive than the greenback, it may remain range bound near par. The second reason for concern is, as Canadian officials have been saying for months, the sharp differential in productivity performance between Canada and the US. The third is that, for the first time in living memory, Canadians’ per capita household debt matches Americans’.” -Pg. 42
Add Don Coxe to the growing list of independent economists and money managers who are calling the Canadian real estate market a bubble and who have voiced concerns over the debt loads of Canadian households.
There are some other interesting snippets from the report.
Coxe on China
Don Coxe is a commodity bull….big time. And it’s made him and his clients a great deal of money. He is a firm believer in the China growth story, which he believes will continue to drive demand for all commodities. I completely agree with that view in the long-term, but I question whether or not China is the near term saviour it’s made out to be. I’ll yield the floor to him for his China bull argument:
“We have had an unusually high volume of detailed forecasts of pending Chinese collapse, so the basic contrarian commodity story of Chinese growth supplying raw materials demand remains intact. As MacroMavens notes, China’s forex reserves have grown four times faster than its GDP in the past decade, while debts have grown faster than GDP in North America and Europe. The Chinese national piggy bank compared to America’s savings is a mastodon to a piglet. As long as the predictors of Chinadoom remain prominent, the upside for commodity investors remains intact.”
He raises some great points, though I’m not sure I would agree that the new prevailing mentality is that China is in a widespread economic bubble. I’d argue that this sentiment is still in the minority and is certainly not indicative of the widespread group-think indicative of contrarian indicators. For the bear argument, check this out.
Coxe on inflation and deflation
Once again let me say that I agree with Coxe about inflation over the longer term. Where we disagree slightly is in the near term. I believe that most of the Western world will experience strong deflationary forces over the near term as the massive debt loads at all levels of society are either paid down or defaulted on. But after that, when the credit demand and the velocity of money pick back up, THEN you’ll see very strong inflationary forces. Though I’m not convinced we’ll see a widespread repudiation of fiat currencies, I do acknowledge that the chances are higher than most care to consider. On the inflation/deflation debate, Coxe had this to say:
“The risks of deflationary collapse are lower now than earlier in the year, but the fundamental problems within the financial system remain unresolved.“
Based on the heavy commodity and inflation-protected bond exposure suggested by Coxe in his suggested asset allocation, it’s clear he believes that inflation and not deflation will be the story of the next few years. I’m far from convinced.
Read the whole report. It’s well worth the time. You may also find his suggested asset allocation for Canadian pension plans quite interesting. I am planning on doing another post on asset allocation at some point. We may return to Mr. Coxe’s suggested portfolio and see how one could create that portfolio using a few simple ETFs.