Veteran market watcher Komal Sri Kumar warns of a ‘cloud of uncertainty’ and makes a bold call: ‘My base case is something breaking….in the next 3 months’ | Canada News Media
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Veteran market watcher Komal Sri Kumar warns of a ‘cloud of uncertainty’ and makes a bold call: ‘My base case is something breaking….in the next 3 months’

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After the Federal Reserve started raising interest rates to fight the rise of inflation in March 2022, Wall Street’s top minds released a steady stream of recession predictions. Surely, they warned, rising borrowing costs, sky-high consumer prices, and geopolitical tensions would combine to slow the economy to a standstill—or worse. Some even argued that a “major recession,” an economic “hurricane,” or “another variant of a Great Depression” could be on the way.

But it’s been more than 20 months since the Fed’s first rate hike and we’re all still waiting for the experts’ nightmare scenarios to become reality. The labor market has remained relatively robust; GDP continues to grow; and inflation is falling back towards the 2% target rate.

The economy’s resilience has led some forecasters to revise or retract their pessimistic predictions. There’s even a growing group of experts who believe a “soft landing”—where interest rate hikes reduce inflation without sparking a recession—is now the most likely outcome for the U.S. in 2024.

But Komal Sri-Kumar, founder and president of the macroeconomic consulting firm Sri-Kumar Global Strategies, isn’t buying the optimism. “My base case is something breaking,” he bluntly told CNBC Tuesday.

A veteran market watcher who spent years at the asset manager TCW Group as a chief global strategist before starting his own consulting firm, Sri-Kumar said he doesn’t foresee “anything specific” breaking, but there are so many fragile areas of the economy after 20 months of interest rate hikes that he’s sure something will crack—and soon. “I think you’re going to see a decisive moment come within the next three months,” he warned.

What might ‘break’

Sri-Kumar’s top areas of concern include the ailing commercial real estate market and banking sector, among many others. The commercial real estate sector has famously struggled due to rising borrowing costs over the past two years, with the office space segment being particularly affected as the persistence of the work-from-home trend leads to rising vacancies. Sri-Kumar warned that there could be more fallout to come in this sector in 2024, as office owners attempt to refinance their loans with interest rates at their current high levels.

Commercial real estate’s issues also play into Sri-Kumar’s biggest concern—“troubled loans” at banks. The veteran market watcher pointed to a recent study from the Kansas City Federal Reserve which found that U.S. banks have $550 billion in unrealized losses on their securities holdings. Unrealized losses were a major contributor to the panicked bank run that took down Silicon Valley Bank in March, making them a big concern for banks, especially if the economy begins to crack and loan defaults rise.

“At some point, it breaks,” Sri-Kumar said of banks’ rising unrealized losses, adding: “I don’t know whether it is this morning or a morning three months from now. And that’s the reason why you’re operating perennially in a cloud of uncertainty.”

The bulls are still on parade—for now

Sri-Kumar is one of many economists who have warned—and continue to warn—of impending economic doom over the past few years. But so far, in 2023, bulls have been rewarded for their faith in the U.S. economy.

The S&P 500 has returned roughly 19% to investors year to date, nearly making up for the losses it suffered in 2022 during the first phase of the Fed’s interest-rate-hiking campaign. At the same time, GDP grew 4.9% in the third quarter, surprising economists, and inflation has fallen from its 9.1% peak in June 2022 to an annual rate of just 3.2% in October.

For Jan Hatzius, chief economist at Goldman Sachs, the solid data is a sign that we’re headed for a soft landing. “We’ve already gotten through the biggest hit from the tightening without the economy having entered a recession,” he said on the latest episode of Bloomberg’s Odd Lots podcast.

Hatzius sees just a 15% chance of a U.S. recession over the next 12 months, which matches the average historical odds. It’s a stance that clashes with many of his Wall Street peers, however.

A number of top economists believe that the Fed won’t be able to truly tame inflation with interest rate hikes unless there is a significant rise in unemployment—owing to the Phillips Curve, an economic construct that argues that inflation and unemployment have an inverse relationship.

But Hatzius believes the old Phillips Curve model just doesn’t work. “Look at the scoreboard all around the world, and it’s really not just the U.S., we’ve seen this decline in inflation without much labor market weakness. It is possible,” he said.

The famed economist said he’s feeling more confident that the hard part of the Fed’s inflation fight is over and the economy has room to run. However, he cautioned that, in this uncertain economic environment, it’s important for forecasters to have “humility.” No one really has a crystal ball.

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A timeline of events in the bread price-fixing scandal

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Almost seven years since news broke of an alleged conspiracy to fix the price of packaged bread across Canada, the saga isn’t over: the Competition Bureau continues to investigate the companies that may have been involved, and two class-action lawsuits continue to work their way through the courts.

Here’s a timeline of key events in the bread price-fixing case.

Oct. 31, 2017: The Competition Bureau says it’s investigating allegations of bread price-fixing and that it was granted search warrants in the case. Several grocers confirm they are co-operating in the probe.

Dec. 19, 2017: Loblaw and George Weston say they participated in an “industry-wide price-fixing arrangement” to raise the price of packaged bread. The companies say they have been co-operating in the Competition Bureau’s investigation since March 2015, when they self-reported to the bureau upon discovering anti-competitive behaviour, and are receiving immunity from prosecution. They announce they are offering $25 gift cards to customers amid the ongoing investigation into alleged bread price-fixing.

Jan. 31, 2018: In court documents, the Competition Bureau says at least $1.50 was added to the price of a loaf of bread between about 2001 and 2016.

Dec. 20, 2019: A class-action lawsuit in a Quebec court against multiple grocers and food companies is certified against a number of companies allegedly involved in bread price-fixing, including Loblaw, George Weston, Metro, Sobeys, Walmart Canada, Canada Bread and Giant Tiger (which have all denied involvement, except for Loblaw and George Weston, which later settled with the plaintiffs).

Dec. 31, 2021: A class-action lawsuit in an Ontario court covering all Canadian residents except those in Quebec who bought packaged bread from a company named in the suit is certified against roughly the same group of companies.

June 21, 2023: Bakery giant Canada Bread Co. is fined $50 million after pleading guilty to four counts of price-fixing under the Competition Act as part of the Competition Bureau’s ongoing investigation.

Oct. 25 2023: Canada Bread files a statement of defence in the Ontario class action denying participating in the alleged conspiracy and saying any anti-competitive behaviour it participated in was at the direction and to the benefit of its then-majority owner Maple Leaf Foods, which is not a defendant in the case (neither is its current owner Grupo Bimbo). Maple Leaf calls Canada Bread’s accusations “baseless.”

Dec. 20, 2023: Metro files new documents in the Ontario class action accusing Loblaw and its parent company George Weston of conspiring to implicate it in the alleged scheme, denying involvement. Sobeys has made a similar claim. The two companies deny the allegations.

July 25, 2024: Loblaw and George Weston say they agreed to pay a combined $500 million to settle both the Ontario and Quebec class-action lawsuits. Loblaw’s share of the settlement includes a $96-million credit for the gift cards it gave out years earlier.

Sept. 12, 2024: Canada Bread files new documents in Ontario court as part of the class action, claiming Maple Leaf used it as a “shield” to avoid liability in the alleged scheme. Maple Leaf was a majority shareholder of Canada Bread until 2014, and the company claims it’s liable for any price-fixing activity. Maple Leaf refutes the claims.

This report by The Canadian Press was first published Sept. 19, 2024.

Companies in this story: (TSX:L, TSX:MFI, TSX:MRU, TSX:EMP.A, TSX:WN)

The Canadian Press. All rights reserved.

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S&P/TSX composite up more than 250 points, U.S. stock markets also higher

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TORONTO – Canada’s main stock index was up more than 250 points in late-morning trading, led by strength in the base metal and technology sectors, while U.S. stock markets also charged higher.

The S&P/TSX composite index was up 254.62 points at 23,847.22.

In New York, the Dow Jones industrial average was up 432.77 points at 41,935.87. The S&P 500 index was up 96.38 points at 5,714.64, while the Nasdaq composite was up 486.12 points at 18,059.42.

The Canadian dollar traded for 73.68 cents US compared with 73.58 cents US on Thursday.

The November crude oil contract was up 89 cents at US$70.77 per barrel and the October natural gas contract was down a penny at US2.27 per mmBTU.

The December gold contract was up US$9.40 at US$2,608.00 an ounce and the December copper contract was up four cents at US$4.33 a pound.

This report by The Canadian Press was first published Sept. 19, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Construction wraps on indoor supervised site for people who inhale drugs in Vancouver

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VANCOUVER – Supervised injection sites are saving the lives of drug users everyday, but the same support is not being offered to people who inhale illicit drugs, the head of the BC Centre for Excellence in HIV/AIDS says.

Dr. Julio Montaner said the construction of Vancouver’s first indoor supervised site for people who inhale drugs comes as the percentage of people who die from smoking drugs continues to climb.

The location in the Downtown Eastside at the Hope to Health Research and Innovation Centre was unveiled Wednesday after construction was complete, and Montaner said people could start using the specialized rooms in a matter of weeks after final approvals from the city and federal government.

“If we don’t create mechanisms for these individuals to be able to use safely and engage with the medical system, and generate points of entry into the medical system, we will never be able to solve the problem,” he said.

“Now, I’m not here to tell you that we will fix it tomorrow, but denying it or ignoring it, or throw it under the bus, or under the carpet is no way to fix it, so we need to take proactive action.”

Nearly two-thirds of overdose deaths in British Columbia in 2023 came after smoking illicit drugs, yet only 40 per cent of supervised consumption sites in the province offer a safe place to smoke, often outdoors, in a tent.

The centre has been running a supervised injection site for years which sees more than a thousand people monthly and last month resuscitated five people who were overdosing.

The new facilities offer indoor, individual, negative-pressure rooms that allow fresh air to circulate and can clear out smoke in 30 to 60 seconds while users are monitored by trained nurses.

Advocates calling for more supervised inhalation sites have previously said the rules for setting up sites are overly complicated at a time when the province is facing an overdose crisis.

More than 15,000 people have died of overdoses since the public health emergency was declared in B.C. in April 2016.

Kate Salters, a senior researcher at the centre, said they worked with mechanical and chemical engineers to make sure the site is up to code and abidies by the highest standard of occupational health and safety.

“This is just another tool in our tool box to make sure that we’re offering life-saving services to those who are using drugs,” she said.

Montaner acknowledged the process to get the site up and running took “an inordinate amount of time,” but said the centre worked hard to follow all regulations.

“We feel that doing this right, with appropriate scientific background, in a medically supervised environment, etc, etc, allows us to derive the data that ultimately will be sufficiently convincing for not just our leaders, but also the leaders across the country and across the world, to embrace the strategies that we are trying to develop.” he said.

Montaner said building the facility was possible thanks to a single $4-million donation from a longtime supporter.

Construction finished with less than a week before the launch of the next provincial election campaign and within a year of the next federal election.

Montaner said he is concerned about “some of the things that have been said publicly by some of the political leaders in the province and in the country.”

“We want to bring awareness to the people that this is a serious undertaking. This is a very massive investment, and we need to protect it for the benefit of people who are unfortunately drug dependent.” he said.

This report by The Canadian Press was first published Sept. 18, 2024.

The Canadian Press. All rights reserved.

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