19.08.2019

What’s a Yield Curve, Why Should I Care, and Other Questions, Answered

Back in March, we reported on the news that Canada’s yield curve had inverted. Since then, it’s become even more inverted – to levels not seen since 2000, causing analysts to step up speculation about a possible recession.

It doesn’t help matters that this week, the US’s yield curve also inverted. So did the UK’s. Due to the interconnectedness of our economies, a recession in the US and/or the UK is no bueno for Canada. Deep breath.

Let’s start by refreshing your memory: A yield curve is, essentially, a graph plotting the yields (how much money you get) from a range of bonds (government-issued I.O.U.s) plotted by the time-length of the bond (beginning at one month, ending at twenty years).

The graph below shows how a 3-month Canadian bond has surpassed a 10-year bond in terms of profitability in recent months.

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Normally, long-term bond purchasers can expect to receive a higher yield for the longer amount of time they are lending cash to the government. When it’s inverted, as it is now, that indicates the bond market is predicting low growth in the future.

It also signals that short-term borrowing costs are more expensive than long-term costs, meaning that consumers decrease their spending, and corporate execs hit ‘pause’ on business investments.

So are we on the brink of recession?

It’s tough to say. Our other indicators, like unemployment, inflation, and trade are looking pretty darn good. No single indicator can predict a recession, or the depth or degree to which it will affect the economy.

The same goes for the US and the UK, whose yield curves are not quite as inverted as ours. Both countries are more complex than a single graph can describe, and there are several factors at play.

As an ounce of prevention for the Canadian economy, the Bank of Canada may cut interest rates to encourage spending.

We’ll keep you posted. In the meantime, don’t forget to brag to your colleagues that you know what an inverted yield curve means, ok?

 


 

Everybody’s mad at SNC-Lavalin – what else is new?

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Muammar, stirring up shit even from the grave.

By now, you’re probably well aware of the political sh*tstorm surround SNC Lavalin and PM Trudeau, who was recently found guilty of violating the Conflict of Interest Act with regards to his handling of the *situation*. Here’s what it all means for the company’s financial health.

As covered by our friends at Pressed News: SNC-Lavalin, a colossal Montreal-based engineering company with an unsavoury history of less-than-ethical business practices, was charged with attempted bribery and fraud (see sartorially challenged dictator below). Former Attorney General and Justice Minister Jody Wilson-Raybould was allegedly pressured by Trudeau to cut the company some slack. She said no. He didn’t take that kindly. You can check out Pressed’s full coverage here.

SO, where does that leave SNC-Lavalin from a financial standpoint?
To put it bluntly, their performance has been piss-poor. In July, share value slumped to a 14-year low, a direct result from the backlash of the scandal coupled with their recent history of performance issues.

In an attempt to salvage and reverse the damage, they are undertaking some serious strategic measures. SNC-Lavalin will no longer bid for fixed-price contracts (due in part to their shady practices being caught out) and is undertaking restructuring plans by splitting into two reporting units, one focused on growth areas and the other dealing with its failing resources and infrastructure construction businesses.

SNC-Lavalin’s plummeting share prices have their investors pissed.

As stated (hilariously) by SNC Investor David Taylor: “I am happy they are going to stop investing in the fixed-price contract, but I am really, really upset as to how they got into this position in the first place and how they screwed up.”

“So it’s like thanks very much for not punching me anymore, I appreciate it, feel so much better, but I’d love to know why they punched me in the first place.”

As evidenced by their shares losing a WHOPPING 50% of their value this past year and with 9,000 Canadian jobs at stake as stated by the PM, it’s obvious that serious changes have to be made within SNC-Lavalin for the company to a) save a little face, and b) survive.

 


 

#ArtoftheDeal… or no Deal? Trump V. China Continues

Like we just said – the inverted yield curve suggests we might need to be concerned about a global recession.

Another factor that has economists concerned? Continuously rising tensions between US and China.

ICYMI: beginning last July, the USTR (United States Trades Rep) placed tariffs on over US$250B worth of Chinese products, including technology, weapons, and medical devices, with threats to place tariffs on much more.

Unsurprisingly, Chinese President Xi Jinping hit back with tariffs on US$110B of American products, including meat, fruit, metals and cars.  Most of these tariffs will get passed on to businesses and consumers, who end up paying for goods at higher prices.

Trade talks in early August failed to yield a positive result: after complaints by Trump that China has not followed through on a promise to buy more U.S. farm products, he announced and additional 10% tariffs on $300 billion worth of Chinese imports.

On August 5, China responded by pausing purchases of U.S. agricultural products. To offset effects on Chinese exporters, the Chinese currency, the yuan, weakened past the key seven per dollar level– its lowest level since 2008. That evening, the U.S. Treasury accused China of manipulating its currency, knocking the U.S. dollar sharply downwards, and causing the yield curve to invert.

Returning from vacay this weekend- Trump and his team announced that he “[doesn’t] think we’re having a recession”, and believes the economy is pretty strong. Larry Kudlow, Trump’s chief economic advisor, also echoed this optimism– and said that Washington and Beijing will be re-engaging in talks soon to complete trade deals.

Trump, however, is “not ready to make a deal yet.” In the leadup to the 2020 election, a strong economy will be key for re-election prospects, so rising wages and spending and saving habits of Americans bode well for Trump. Trade talks are set to take place in September.