Eye of the Beholder

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In 1888, Martha Matilda Harper became the world’s first professional beautician. In addition to inventing the first reclining shampoo chair, Ms. Harper became famous for opening the first ever, stand alone beauty salon.

Next up to dominate the industry was Elizabeth Arden. Her success was founded upon expanding the salon concept to 1000s of stores around the world, and for the distribution of her self made products, most notably lipstick.

Today’s top beautician is breaking the mold. His product and distribution are light years ahead of anything dreamed of by both Harper and Arden, and best of all he truly believes if he applies just the right amount of foundation, concealer and lipstick (especially lipstick), then he can make anything beautiful and attractive.

Up to this point, his business has been a self-declared, resounding success. His salon is in Frankfurt, Germany. His company has gathered over $5 billion in assets, and his clients total over 340 million people.

Yet recently, more and more people are realising that all isn’t as beautiful as meant to be. Cracks are building in the foundation, mascaras are running long, and worst of all, the lipstick has been smeared.

Mario Draghi’s days as both Beautician and President of the European Central Bank are starting to show their wear. While the headline news celebrates the outcome of France’s election, Europe’s governments and banks remain burdened in a financial struggle that even the very best lipstick cannot hide.

Two things are for certain.

One, underneath all the financial make-up applied by Mario Draghi remains a fractured, unworkable Eurozone system.

Two, the majority of investors around the world are not prepared to see what is truly behind Draghi’s scheme to delay the inevitable.

Canada Top of the World

This Toronto icon rises above the clouds; it rises above its west coast rival , and is also towers above any of its rival’s south of the border.

Yes, the CN Tower dwarfs its competition and 40 years after completion it continues to rank amongst the tallest in the world.

Yet within its own city, the CN Tower has taken a back seat to another towering, momentum building mass – the housing market.

Whereas many housing markets were stopped cold turkey in 2008, Torontonians merely paused for a refreshment, and then quickly jumped on the back of the world’s zero and negative interest rate experiment and marched higher.

Naturally, for all investments, perspective is everything.

It looks great from up here!

Unfortunately, perspective is formed on the basis of subjectivity. And to demonstrate just how poor perception can alter reality, consider recent conversations we had with other managers around the world:

New York – Head of a Derivatives Trade Desk had no idea that interest rates in Germany were negative – “truthfully, we only monitor the US market.”

Chicago – Senior Bond Manager – “we only watch the FED, really, everyone else doesn’t matter.”

Toronto – Bank Economist – “housing is the only thing anyone is talking about and asking about these days.”

To put this another way, and once you grasp this all-important piece of knowledge, you’ll better appreciate all the gibberish spouting from the big-bank-lead talking heads – there are very few, true global investment managers in the world.

In fact, we estimate over 90% of investment managers always see the world from the eyes of their own country, and are either unwilling, unable or simply restricted from seeing the world from any other lens.

What’s in Toronto now is undeniably, both fun and terrifying to watch.

The fun part is seeing what so many others will not. The terrifying part is understanding what happens when the housing market bubble breaks.

And just to remind everyone, understand that all bubbles pop – it’s science, it’s inevitable, and the point that breaks it will completely surprise the majority of those who are expecting it to pop.

For starters, ask anyone in Toronto if they believe there is a bubble and their answer depends whether they are a home owner or not.

Those who own a home, will claim prices may have gotten a bit out of whack, but things will stay flat for a while at worst.

Meanwhile, those who do not own a home claim prices are indeed bubblicious and once the bubble splatters, they’ll be there to scoop up condos faster than Roberto Alomar scooping up double plays.

For those who are not familiar with the Toronto market, or its baseball stars from yesteryear, just know that the clock that keeps Toronto ticking is the good ole’ financial industry.

Just as the Calgary market crashed when oil crashed, and the Tokyo market crashed when the Yen crashed, anyone who is forecasting the safety or the demise of the Toronto market must completely understand the main driver of the global financial industry.

Which is of course – long term interest rates.

And once you’ve figured this out – your vantage point will be even better than from atop the mighty CN Tower.

Darwinism

Chart 1 next page, details the evolution of the global financial system since the 2008-09 credit crisis.

The good news is that after 7 years of financial oppression, those who have not benefitted from extreme monetary stimulus, the playing field will once again be level for all players.

The bad news is that after 7 years of financial oppression, those who cannot recognise the risks that have accumulated, are about to be red carded right off the field.

Let us explain.

For a number of reasons, the vast majority of investors around the world solely look at the stock market. Everything good and everything bad always comes from and away from the stock market.

In truth – the grease that keeps the world’s mighty economy and debt eating machine chomping through the night is ladened with interest rates.

Yet, few are able to see, speak or even dream about interest rates. The big banks are especially unable to articulate their importance.

Instead, their compliance-approved, snooze-worthy market commentaries occasionally dare to mention everyone’s favourite financial axiom – valuation. And even then, the trained eye can see the rather lack of conviction in the use of the word.

To better grasp the vital importance of this discussion, just know that long-term interest rates are to the bond market as oil prices are to the energy market.

From 2003 to 2008, oil prices shot to the moon dragging along every investment with even the slightest positive linkage.

The same also occurred in 2014 – but with a negative reaction when oil prices crashed from $100 to $50.

Yes, prior to the most recent devastating oil correction, people couldn’t get enough real estate in Alberta and Texas. And they couldn’t get enough energy stocks and their high paying dividends.

In both cases, the perceived risk was non-existent. Oil prices would only go in one direction – up, and that was the end of story.

Well, we all know now that it wasn’t the end of the story. In fact, it was only the beginning of another story, one in which turned into a nightmare for all of those riding the great oil express.

Today, the exact same story is playing out. Instead of it occurring in the oil patch and affecting a smaller segment of the investment universe, the story today is occurring in a field that covers the world from east to west, north to south and every nook and cranny in between. This field of course, is the interest rate field and the entire bond structure used by investors everywhere.

Beautician

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