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How Canada’s big banks pumped up the housing bubble

A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web

The secular decline in interest rates and bond yields began in 1982, and very few current investors were active in markets before that time.

The market rules in a rising rate environment are very different from those of the past 35 years. For one, capital intensive businesses like utilities, telecoms and real estate underperform as their borrowing costs rise while commodities, with hard assets that protect against inflation tend to outperform.

I'm not sure if we're entering a rising rate environment yet – the lower for longer/secular stagnation/Japan scenario possibilities are still very plausible. At the same time it's also true bond yields – which didn't have much room to fall – are now climbing. A chart posted on twitter implies that ten year U.S. bond yields are currently testing their long term range, and a breakout would be very important for domestic investors, if not definitive.

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"@ReutersJamie US 10-year Treasury yield now 2.60%. Will it finally break out of its 35-year downtrend ... or fail yet again?" (chart) Twitter
"Bond yields just hit the level that Bill Gross said would signify a bear market" – CNBC
"Dividend and income investors: Here's how rising yields will bite into your returns" – Barlow, Inside the Markets

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A Maclean's report details domestic banks' love/hate relationship with the real estate bubble,

"he Big Six are the beating heart of a financial system that favours real estate over more productive investment, such as lending to entrepreneurs. They pushed the cheap, post-crisis mortgages that have turned Canada into one of the most indebted countries in the world. There have been no shortage of studies making this point. Just this week the Basel, Switzerland-based Bank for International Settlements, or BIS, updated a series of numbers it considers indicative of financial stress. The BIS tracks four 'early warning' indicators of stress in domestic banking systems, and Canada was the only country that triggered red lights in three of the four… [Royal Bank CEO] McKay's list of 'dangerous catalysts' includes ultra-low interest rates, limited supply, and speculators. He appears to have omitted at least one big one: himself, and his counterparts at the other big banks. By attempting to shift the spotlight to international buyers, McKay diverts attention from Bay Street's role in inflating the bubble."

"How Canada's big banks pumped up the housing bubble" – Maclean's

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In the energy sector, Gadfly's Liam Denning argues that OPEC has lost control of the crude price, thanks to technological innovations including, but not exclusive to, shale drilling,

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"More intriguing were snippets that sounded more like something out of Silicon Valley than Houston. For example, Hess Corp. CEO John Hess seemed almost giddy on Monday as he talked of moving his company's data to the cloud (yes, Amazon.com Inc. is now helping to power the shale boom, too).There are many other examples, ranging from Siemens AG's remote operating system for an oil platform in the North Sea -- meaning fewer expensive offshore staff -- to the likes of Maana. This Palo Alto-based start-up deploys a different type of platform -- software -- helping oil companies use more of their vast troves of data to make smarter operating decisions. While the world isn't used to thinking of oil and gas as a technology-driven business, it of course is. Higher productivity in areas such as the Permian basin stems partly from more-accurate drilling and better-informed fracking from gathering and processing more data."

"Oil's Prize Fight: The Select Versus The Swarm" – Gadfly
"Oil Trades Below $50 After U.S. Supply Glut Erases OPEC's Gains" – Bloomberg
"Oil edges off three-month low but glut worries persist" – Reuters

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Tweet of the day: "Downtown Josh Brown @ReformedBroker MUST READ: The creator of the Vix doesn't think it works anymore. His new focus is not on fear but on ambiguity. wsj.com/articles/wall-… " – Twitter

Bonus Tweet of Day: "@RealEOC: David Fincher's handwritten list of his 26 favorite movies. pic.twitter.com/O6cDK8zOlk " – Twitter

Diversion: "Neanderthal Dental Plaque Shows What a Paleo Diet Really Looks Like" – The Atlantic

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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