Financial crisis #2

The perverted effects of having a negative yield curve is finally hitting the financial markets. In particular, this is hitting the banking sector in Europe, but there is also spill-over effect in the USA as well – I had previously written about Bank of America, but this is also affecting other financial institutions.

However, I do have a general rule and that is whenever it hits the headlines of mainstream publications, it is likely closer to the 9th inning of the ballgame rather than the beginning.

I observe on the Drudge Report, which is usually ahead on things:

Once news like this starts getting on the covers of the various US magazines and such, then it is likely over.

Canadian publications are also picking up on the fact that the government bond yield curve is flat-to-inverting:

Target overnight rate: 0.5%
1 month: 0.43%
1 year: 0.42%
2 years: 0.35%
3 years: 0.35%
5 years: 0.48%
7 years: 0.79%
10 years: 1.01%

The half-point spread is a very pessimistic for the Canadian economy – people are willing to pay dearly for safety at the moment.

With government bond yields so low, investors must look elsewhere to obtain yield. This leads institutions into the wonderful world of corporate debt, and you can ask how the big 5 Canadian Banks (Royal, Scotia, CIBC, TD and BMO) are doing with all of their secured credit lines they’ve given to a lot of the oil and gas industry, in addition to their mortgage portfolios.

The Bank of Canada must be watching the sector like a hawk right now because if there is a cascade of confidence loss, things will get very ugly and very quickly. Conversely if this crisis starts to fade away, investors will be handsomely rewarded for taking the risk right now.

In the meantime, enjoy the volatility. The environment right now is once again reminding me of something like mid-2008 when everything is all panicky. Bargains that have good potential for double-digit appreciation are hitting the radar in huge frequency.