By Tom Bradley

In last Friday’s Report on Business, Scott Barlow wrote an article entitled, ‘The Scariest Chart You’ll See all Year’ (it was a price chart showing how the S&P/TSX Composite Index has diverged from the MSCI Emerging Markets Index after tracking it closely over the previous two years).

The headline got me thinking about what my scariest chart would be. It didn’t take me long to decide, since I’ve been telling anyone who will listen that the chart (or statistic) that I’m most worried about is the growing consumer debt load. For Canadians and the Canadian economy, I can’t think of anything that’s more important, or more scary. (Note: This rather negative piece is not speaking to what Canadian stocks will do. Some stocks will be impacted, but our market is more driven by international factors and ... wait for it ... valuation measures.)

I say scary because we have no cushion. An increase in interest rates or downturn in employment will cause serious hardship. And unfortunately, our usual backstop, the government, is also stretched. There will be little relief from the politicians when there is a downturn. Meanwhile, this debt surge is happening at a time when interest rates are unsustainably low (even after the recent rise) and credit conditions are about as good as they can get.

But the scariest part is what’s embedded in the chart, specifically the changing attitude towards debt. Low rates and pushover bankers are breeding complacency. We may not be where Americans were ten years ago, but we’re getting there. It’s not uncommon to see young people (some still in school) making monthly car payments so they have a nice ride. There are too many households that are making monthly payments on their mortgage, car leases/loans and credit cards, all while maintaining a line of credit. And an increasing number of people are retiring without having paid off their mortgage. Canadians are saying, “Why save up and buy it later when I can borrow and buy it now?”

When I talk to people about debt, I find them to be blasé. Young people particularly can’t envision rates being 5 or 6%, let alone 8 or 9%. They don’t see the need to scope out some downside scenarios with mortgage rates 2% higher, a spouse out of work and/or house prices 15% lower and not selling.

We’re hearing lots of dire warnings about the Canadian economy these days. The CEO’s of the big five banks, our Finance Minister, bank governor and bank supervisor have all been voicing their concerns. I’m never comfortable with consensus, but I think they’re right on. We’re walking a fine line with no safety net below.