"Liquidity is the most under appreciated risk factor out there. We've seen the bond market reprice to an understanding that liquidity is not as abundant as all that, and I would just worry about the liquidity risk... At some point down the road, fundamentals have to validate these high prices." said Mohamed El-Erian, Allianz Chief Economic Advisor May 18, 2015"
At 2.2 minutes in the brief interview snippet, El-Erian posits that "You can't kick the can for the whole global economy. The longer we are in this new normal of low growth and equities are propelled by new cash, the greater is the risk of financial stability down the road."
In a word; valuation.
In the chart above I have highlighted the Government 10 year yields for Canada, the U.S. and the Euro area as well as an overlay of the USD/CAD ratio.
Rates have bottomed in North America and Europe since April 2015, and the first leg up in repricing risk has put rates up to a potential new floor as noted by the coiling action in May.
The USD/CAD ratio has turned up this past week. A strong U.S. Dollar will mute U.S. inflation since domiciled U.S. producers will have a more difficult time setting export prices, and that leads to headlines like "HP plans to eliminate 55,000 jobs by the end of 2015".
In Canada, we can expect our main activity of consumption to be dampened by rising import prices. We may have to switch from Ikea to Craigslist to stuff our condos with.
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'