Econowatch: early September 2011

By Colin Campbell - Monday, September 12, 2011 at 11:30 AM - 0 Comments

The relative calm of markets during the first week of September brought a welcome end to a thoroughly rotten August. For several days, investors rediscovered their inner bulls, largely on reports that U.S. Federal Reserve officials are warming to the idea of buying even more government bonds to try to stimulate the economy.

But there is a wide gap between the sense of optimism that was on display and what’s happening on the ground. Unemployment remains high, with no sign of healthy job creation on the horizon in the U.S. There is still no lifeline in sight for those whose mortgages are underwater (and who couldn’t refinance even if rates keep dropping). The body of evidence suggests that the economy is teetering on the edge of another downturn. In Canada, it has already slipped into reverse as exports fell—a warning sign of what’s happening beyond our borders.

So what might a new round of so-called quantitative easing do to tip the balance in the direction of growth? If the last round, dubbed QE2, is anything to go by, probably not a heck of a lot. Launched in 2010, it sought to add $600 billion into the U.S. economy (on top of the $1.7 trillion added during QE1 to halt the 2008 financial crisis). For awhile, markets soared thanks to all the cheap money available. There were also hopes that the benefits would spill over and translate into lower interest rates, more lending and eventually more spending by businesses and home buyers.

That didn’t happen. The confidence boost from rising stock prices wasn’t enough to overcome America’s bigger economic problems: unemployment and slow growth. QE2 has also been blamed for driving up commodity prices, pushing up the cost of fuel and food. And there’s no reason to think it’ll be any different this time.

CP/iStock/Getty Images

Signs of the times:

• An Italian town has come up with a bold plan to avoid Rome’s deep austerity measures: secession. The mayor of Filettino (pop. 1,000) wants to create a sovereign principality and has already printed up a new currency—adorned with his photo, of course.
• Mere weeks after downgrading U.S. debt to AA for the first time in history, Standard & Poor’s continues to hand out superior AAA ratings to mortgage-backed securities containing subprime loans—the very same financial instruments blamed for spawning the 2008 financial crisis.
• It’s not just bottled water and batteries that fly off store shelves during hurricane season. Strawberry Pop Tarts are another emergency staple, according to an economist who studied Wal-Mart’s extensive preparations for storms.
• As the EU grapples with a deepening financial crisis and fears of a second U.S. recession grow, luxury Parisian fashion house Hermès has a different problem: meeting soaring demand for expensive handbags and silk scarves. Yet another piece of evidence that we may not all be in this together.

Econowatch: May 2011

By Erica Alini - Wednesday, May 18, 2011 at 4:35 PM - 3 Comments

A funny thing happened on the way to the Tory majority. Partway through the federal election campaign, around the time the words “NDP” and “surge” appeared together for the first time, the S&P/TSX index lost its footing. Economists were quick to read the tea leaves: global investors clearly feared Canada might end up with a weak, wobbly minority government headed by socialists. Instead, Canadians voted for the strong, stable majority promised by Prime Minister Stephen Harper, at which point investors ran screaming for the exits. Over the next four days, the market shed five per cent of its value.

Were investors saying a Harper majority was worse than an NDP minority? Of course not. The episode simply revealed that investors believe the main factor driving Canada’s economic future isn’t which party sits in power, but whether commodity prices stay high. The resource boom was the reason for our strong employment, resilient housing sector and phenomenal stock market returns of the last decade. In the same way, the dramatic rebound in commodities in 2009 enabled Canada to sail through the recession mostly unscathed—whatever the Tory’s Action Plan ads claimed. Investors know this, and that the reverse is also true. A sharp commodities correction could cripple the economy. Continue…

Econowatch: April 2011

By Jason Kirby - Thursday, April 14, 2011 at 10:35 AM - 5 Comments

If you tried to count the worries investors face today, you’d soon run out of fingers and toes. We’ve seen rising inflation, unrest across the oil-rich Arab world, a U.S. fiscal crisis and sovereign debt woes in Europe, any one of which might have kneecapped a lesser bull market. Not this one. Two years into the strongest rally ever, not even the prospect of nuclear fallout and the collapse of the world’s third-largest economy is cause for concern.

There are basically two ways to view what’s going on right now. One is that a fundamental disconnect has occurred between market sentiment and reality. In this scenario, investors have affixed blinders to obscure all that ails the economy. In other words, the markets are driven by momentum. When that momentum stalls, look out below.

The other possibility is that all these fears are overblown. Investors have learned from the stock market rout and correction of 2009 not to lose their heads at the first (or even umpteenth) sign of trouble. Instead, some argue there are real reasons to be optimistic: corporate profits are robust, manufacturing is on the upswing and gains in the U.S. job market are picking up speed.

The ultimate test of which scenario is behind the rally will come this year. Central banks are expected to tighten their monetary policies. Interest rates will rise and the virtual printing presses that created trillions of dollars in new money will shut down. With the end of easy money, investors will inevitably become more attuned to risk. Meanwhile, an important crutch that has helped prop up the recovery so far will be gone. If we’re fortunate, both markets and the economy will remain resilient. If not, we’ll look back and wonder why investors ignored so many obvious signs of trouble.

By the numbers

11 The percentage of homes in the U.S. now sitting vacant. In many vacation areas across the country, hit particularly hard by the downturn, vacancy rates are over 60 per cent.

50 The number of years of oil supply that may be left in the world, given current supplies and demand, notes a senior economist with HSBC.

428 The number of KFC, Pizza Hut and Taco Bell franchises in Canada owned by Prizm Income Fund, which has filed for court protection from creditors.

106,000 The number of high-tech jobs that will need to be filled in Canada in the next five years as the dot-com boom returns, notes an industry report.

$4.9 billion The amount U.S. hedge fund manager John Paulson earned in 2010 after betting big on the economic recovery.

Signs of the times: conspicuous consumers

*The U.S. housing market may be in brutal shape, but billionaire Russian investor Yuri Milner just plunked down US$100 million for a California mansion. Milner is an investor in Facebook, Groupon and game-maker Zynga. A sign of life in the housing sector, or just another oligarch with too much money to burn?

*Saks Fifth Avenue had to limit customers to six one-ounce packages of La Prairie’s latest skin care product. The price: $500 each. American consumers, it seems, are flooding back into the US$2.7-billion “prestige” skin care market. No sense looking like you just weathered a Great Recession.

*Subprime mortgage bonds—three words that would have sent investors screaming until recently—have been making a comeback. The bonds, which are backed by thousands of poor quality mortgages, have doubled in value to 60 cents on the dollar since early 2009, as investors have rediscovered their appetite for risk.

*President Barack Obama, an admitted “crackberry” addict, has been a boon to Research In Motion’s marketing campaign. But Obama told reporters he now has an iPad, too. Is that a bad omen as RIM readies to launch its PlayBook tablet?

Chart of the week: spending spree

By macleans.ca - Thursday, April 14, 2011 at 8:00 AM - 3 Comments

Real consumer spending in Canada hit record highs while other major economies stalled. But with retail sales now softening, are Canadian consumers about to hit their breaking point?

Chart of the week: Slow food

By macleans.ca - Wednesday, March 30, 2011 at 11:54 AM - 2 Comments

Source: International Monetary Fund

Food prices have been rising sharply—a trend that’s expected to continue. Still, they remain low compared to prices over the past century.

Econowatch: March 2011

By Jason Kirby - Thursday, March 3, 2011 at 2:15 PM - 10 Comments

Once again contagion looms over the global recovery. Not long ago, investors feared the prospect of which nation the sovereign debt crisis would infect next—having taken Greece and Ireland, would Portugal fall? Spain? Britain? Now unrest is spreading across the Middle East and North Africa as brutalized populations revolt against their tyrannical leaders. And the focus is squarely on whether soaring energy prices could push the global economy back into recession.

Some have argued the subprime crisis didn’t cause the Great Recession, but that it was the fault of the 2008 spike in oil prices. If so, watch out. The price of Brent crude jumped to above US$119 amid the crisis in Libya, before easing back to around US$111. In a new report, Nigel Gault, chief U.S. economist at IHS Global Insight, analyzed the effect on the American economy of a US$10 rise in the price of oil. No surprise—a gallon of gas jumps 24 cents. But each US$10 increase also raises inflation .38 per cent and lowers disposable incomes .26 per cent. If the price rise persists, economic growth gets zapped by more than half a percentage point over a two-year period, as does spending. Meanwhile, 410,000 jobs would be lost. Given that oil has rebounded from about US$40 a barrel since early 2009, it explains a lot about why the recovery has been so disappointing.

What happens now depends on how far the turmoil spreads, and whether panicked traders continue to push oil prices higher. For David Kotok, chief investment officer at Cumberland Advisors and a strategist closely watched for his views on energy issues, the outlook is grim. “This is nowhere near over,” he writes. “The risk of recession in the U.S. and European economies is rising daily.” Continue…