My point is that on the corporate side, which means "investment" in the GDP component, money is getting tighter and more expensive. That segment has been increasing debt levels without an commensurate increase in output ( the marginal productivity of capital investment has been falling). We know that the tax cuts did not go into debt reduction or into growing the capital stock--- it was rewarding shareholders. So, the existing debt needs to rolled over and new debt is needed for new investment. Now, the central banks are making matters worse. and that is reflective in the spreads and the deteriorating quality of the lender. Today, Gundlach argued that about half of BBB bonds, the lowest segment of investment grade should be downgraded to junk which tells you how bad is the quality of debt. That would result in more liquidation by funds who cannot hold junk debt. Remember US corporate debt stands at $6 trillion so there is a lot of debt to negotiate out of.

This is a very good discussion on the role of inventories in the business cycle. Most recessions can be traced to mismatched inventories to sales. This is certainly happening as the Trump tariffs play havoc with supply chains in basic industries. So you are right to bring this issue to the fore.

True bond investors look at decades to determine secular trends as "bear" or "bull" markets, not 2-5 year movement in yields. So, your chart showing a tiny up tick in yields from July 2016 hardly constitutes any meaning in the context of the secular trend. It is just a blip which may be eliminated in large measure by the 2019-20 recession.

It is starting to hurt. I have heard of many mortgage brokers leaving the industry because they cannot service clients. At some point the authorities are going to have to relent on the rules. The worse rule is a new borrower has to show ability to carry a mortgage at 200 bps above the posted Bank of Canada rate for mortgages and that rate is already above the market. An example of bureaucrats not understanding the market they regulate.

Gundlach does not understand the Keynesian concepts of how excess savings will suppress economic growth ex post. At 6% interest and 2% inflation consumption will decline in favour of investment and this will result in excess capacity. That, in turn, will be disinflationary and the 10yr rate will fall sharply to a new, lower equilibrium

Read David Brooks today in the NYT. He mentions how Canada

Is able to redistribute income through fiscal policy and universal health care to the benefit of the middle class. It can be done if there is a political will. Canada has had universal health care since 1965.

We need a better distribution of income and wealth. Deflationary actions will not bring that around. Taxation and spending policies can re-distribute swealth and income and have been in the past many time. Alas, the current US govt is doing precisely the opposite.

You are right. I think the stock market recognizes the deflationary shocks and then looks at the Fed and then says in effect " can't you guys read the handwriting on the wall?"

Thanks.

Leon,

Mortgages rates run off the 5 yr bond yield which today is 1.90%, so that should keep mortgage rates well under control. Also, the prime rate will not go up because the Bank of Canada is on hold for some time--- the data in Canada is looking bleak with the CPI coming in negative for November. So, variable mortgages which are usually prime less 100 bps are get value.