What do I not like in the current investing landscape?
I'm not crazy about a U.S. stock market that trades at a Shiller P/E multiple that we have only seen happen 0.7 per cent of the time in the past. Even adjusted for interest rates, only one-quarter of the time was the S&P 500 this pricey.
I certainly do not like how corporate credit is priced. I mean Netflix, with a B1 rating (junk), managed to float a $1.6-billion (U.S.) bond that matures in 2028 with a yield of 4.785 per cent ... and oversubscribed (there were $2.5-billion worth of orders). Meanwhile, hardly anyone showed up this week for the U.S. Treasury auctions where the bid-cover ratios were below average. Something tells me there are going to be some very long faces if subscriber growth slows or margins get crimped. Just as the big development from quantitative tapering for the Fed will likely be wider mortgage spreads, in Europe it will be wider corporate spreads seeing as the ECB has added $114-billion of business debt to its balance sheet over the past 18 months. People think the bubble is in German bunds but perhaps the nuttiest valuations today are in European high-yield bonds, which trade at yield parity to U.S. Treasuries. Another potential sore spot is Chinese corporate debt, which now has approached an incredible 250 per cent of Chinese GDP. Official estimates show that only 1 to 2 per cent of the outstanding loans are nonperforming, but the WSJ cites independent sources pegging the bad-debt share at closer to 20 per cent. Keep a firm eye on China's bubbly property market – this also could be the trigger point for a default experience that could have global ramifications.
I'm bearish on the outlook for U.S. commercial real estate. The eight-year boom is over and the excess supply is notable, and we see that in vacancies and rental rates and the huge slowdown in deal-flow. Selling activity has been cut to $47-billion so far this year from $71-billion at the same time through 2016.
I'm also squeamish over the areas of the U.S. economy that have completely hit the capacity wall, especially when it comes to labour, and this includes the trucking companies first and foremost, followed by construction. The driver shortage in trucking, as per a survey conducted by the American Transportation Research Institute, is more acute today than any other time since 2006 (if I recall, a recession began the very next year).
And as for the U.S. consumer, there has been an expansion in the past two years fuelled by credit and an epic savings rate drawdown. If it was organic incomes that the household sector had to rely on, real growth in spending would be little better than 1 per cent at an annual rate or half the actual performance.
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David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.