There are two dominant schools of thought emerging in the economy today. They agree on nothing and they’re making quite a racket.
The first group we shall call the Sunshine Gang. After watching stock markets rise 20 per cent in the past month, they’re feeling good. Every piece of economic data that is slightly less awful than it was last month only bolsters their enthusiasm and their oft-repeated mantra that “the worst is behind us.” U.S. Federal Reserve chairman Ben Bernanke bought his membership in the Gang Tuesday morning, telling an audience of college students that he sees “tentative signs” that economic activity is “levelling out.”
On the other side, we have the Legion of Doom—for now, they enjoy the upper hand because in 2007, while the Sunshine Gang was saying that a three bedroom, two bath in suburban Phoenix really could appreciate at 15 per cent a year forever, the Legion was saying it couldn’t . . . and the Legion was right.
But that doesn’t mean that the Legion is going to be right forever, and as they predict ever-lower asset prices, and ever-deeper misery, their warnings begin to sound a touch hysterical.
Last week in Toronto, Ian Gordon repeated his famous prediction that the Dow Jones Industrial Average will fall to 1,000 (from around 8,000 today) before this crisis is over. Such calls are so extreme, and so confidently delivered, that they are inherently fascinating. You know, beyond any doubt, that this person is either a genuine oracle or a complete crank. Either way, there’s a certain frisson that comes from listening to them speak. And we’re hooked on that frisson.
Avery Shenfeld represents the vast middle ground that is too often drowned out by the shouting from either side. Shenfeld’s first report as chief economist at CIBC was entitled “So it’s not 1929 after all,” but he isn’t a card-carrying member of the Sunshine Gang. Shenfeld thinks the market has gotten ahead of itself and is vulnerable to another tumble on any disappointment in corporate earnings.
That said, by the end of 2010 he expects the market to be about 12 per cent higher than it is today—stimulus money will slow the tide of job losses, housing will stabilize and modest growth will return. In other words, this is neither the beginning of a bonanza nor the end of the world. There’s not much frisson in words like that, but there’s probably a lot of wisdom.
GRAPH OF THE WEEK: The geography of job cuts
Life is not fair and neither is the economy. Since October, 356,600 Canadians have lost their jobs, but the turmoil isn’t evenly spread across the country. As the graph shows, Ontario has suffered the lion’s share of job cuts. In percentage terms, B.C. is hardest hit with a three per cent drop in employment (followed by Ontario and Alberta). Only Saskatchewan has held steady so far.
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