Fundamentals Backgrounder (rev 2012/4/20) ~ HEADWINDS: Waning Fiscal
Policy stimulus ~ Hayek & Friedman are fairly convincing in
their arguments for using Monetary Policy rather the Fiscal Policy
during economic contractions. But, when Central Bank interest
rates reach "zero", Fiscal Policy is preferred to Quantitative
Easing (QE) since the latter spurs imported Inflation via debasement
of currency. The reward of Canada's austerity measures in the
1990's is the finding of itself as one of a select number of nations
able to use fiscal stimulus. Greece & the USA represent a
sorry lot of jurisdictions that cannot 'cuz of their failure to
surplus budget at the crests of business cycles, leaving them with
sovereign Debt/GDP ratios exceeding 90%.
Deficit borrowing for
fiscal stimulus harms the economy in the long run 'cuz debt servicing
usually outweighs rising safety net costs in downturns.
However, it is a reality in democracies and republics that governing
parties will often bow to media and public pressure to combat the social
costs of rising unemployment rates.
Canada paid down 15%
national debt over the past decade, so was in excellent shape
to take on the task. But, waning Federal & Provincial stimulus
cheques revealed the immature business cycle lacked sufficient
critical mass to battle headwinds already in play and the economy
stalled in 2011, facing GDP contractions in Feb/Apr/May & Nov.
Fundamentals Backgrounder (rev
2010/12/23) ~ Some would argue Canada's $62 billion Economic Action
Plan (EAP), proposed in January 2009, was overly generous. In
fact recognized studies have shown that Keynesian spending to
extract an economy from Recession is more expensive on the long term
when deficit borrowing costs are factored in. Economic purists
would further explain that State interference and subsidies also
upset the natural "cleaning out" processes of wayward commerce and
Instead, political pragmatism dictates
that the social cost of these periodic episodes must be mitigated.
In Canada's case, with the Unemployment Rate stubbornly at 8.1%
(after a high of 8.7%), the excess fiscal stimulus is seen to be a
welcome aid in getting the Rate back to the pre-Recession 2007 low
of 5.3%. In the absence of Inflation, Bank of Canada had
obliged with a low interest rate regime to enable this quest for
full employment. Pleasantly surprising tax revenues and
royalties resulted in last year's Federal Gov't Deficit being $47
billion ... $7 billion less than had been forecast.
The reality is that any Government that
defied the G-20 call-to-arms for concerted stimulus action would
have faced expulsion either by combined Opposition Parties or the
electorate. There is no doubt this would have been the demise
of the Federal Conservatives here in Canada. The EAP, jointly
funded by Federal, Provincial, Territorial, Regional & Municipal
jurisdictions comes to an end in March 2011.
Over the past year the Loonie has climbed 20%,
mostly on the doubling of crude prices. Both the Canadian & Australian
currencies are unfortunately cursed with the infliction of still
being considered commodity sensitive. A rising Dollar impedes
exports and thus the manufacturing sector.
Despite near-record low interest rates,
Canada's superb macro economic fundamentals have encouraged foreign
investment, as well as somewhat of a safe haven status; and even
limited reserve currency status on the international scene.
have not gone unnoticed at the Chicago Mercantile Exchange, where high
Loonie-related speculation activity was reflected by record long futures
volume (120,000 long non-commercial contracts) in mid-April. This
exuberance expired; volume drifted to a mere 24k in mid July;
but rejuvenation of volume this month to 65k warrants vigilance.
Based on current commodity prices and other macro-economic
fundamentals, the Canadian Dollar has a fair value of $0.87 today
agin the USDollar. That the Loonie in April already visited
par with only
contract crude implies the 2010 bump was built upon far too much
anticipation. If neophyte speculators carry the day and oil
revisits the 2008 $131 high, Canada's Dollar could spike briefly to
$1.18 in the present environment ... truly uncharted territory.
Our projected moderation of the Canadian economy in part reflects
export challenges in a protracted par-plus CdnDollar environment.
Because GDP growth rates are correlated to the USA, it is prudent to
understand the vulnerability south of the 49th. For the past
decade, I have warned of the consequences of growing structural
deficits and the impending
Federal Debt Wall
in the USA. Because both Congress & consecutive Presidents
have failed to address this issue, the USDollar has been in secular
decline since January 2002. Failing an earlier intervention by
bond vigilantes, America will probably face the beginnings of a
Greek style Debt Crisis in 2022 ... marked by Treasury downgrades,
major bumps in yield (3%) and ultimately ... withdrawal from the
treasury auctions by tier-1 investors.
As most crude oil is denominated in USDollars,
its price reacts inversely to movements in the Dollar. As
illustrated in our
chart, the USDollar debasement is a dominant component in price
discovery and will continue to grow if the US Gov't continues its
fiscal mismanagement. Resultant rising crude costs could
increase pump prices to the extent they approach the same
that decimated USA New Car Sales in 1980, 1990 & 2007.
analysis has been an improvement over our previous reviews.
The recent change in sentiment reflected rumblings that the Bush tax
cuts (due to expire at year-end) were unlikely to be extended in
present form by
Congress. This situation reflects fear that the momentum of
the EURO has reached critical mass. Austerity measures
in the EuroZone have benefitted the EUR:USD exchange rate rising to
1.36 from only 1.18 during the Toronto G-20 Summit. Prime Minister
Stephen Harper has been celebrated worldwide for his instrumental
role in convincing G8-G20 nations to adopt aspirational targets of
halving their deficits by 2014. Thus it is distressing to see
resolve to maintain the tax cuts should they be victorious in next
week's congressional Elections. Breach
of this threshold would occur @ $89/barrel crude. Another
critical juncture would occur if oil passes thru the $106/barrel
threshold: another round of G-20 Recessions ... and inevitable
negative effects on our worldwide exports. As a caveat, our
projected rise in GDP growth rate from this juncture assumes only
the most minor of extensions to the Bush tax cuts in December.
Canada's average home prices were double their
from October 2009 to May 2010. The annualized 2010 Canadian
avg price exceeds the long term Price / Family Income ratio trend by
29%. Canada is today suffering a
$76,000 Housing Bubble.
The average monthly Price plunged $22k (6%) after peaking in May
2010. With the experience of our 1989 Bubble event, consumers
are more likely to see a multi-year flat-line realty price
correction than the deep-plunge episode witnessed by the USA in
dealing with its own $61k (28%) bubble peak in 2005.
Still, in light of the potential (29%)
correction, we continue our plea to CMHC (back on 2010/3/24) that it
would be prudent for them to temporarily increase its down-payment
requirement for high-ratio insured mortgages to 10% (from 5%) until
the downside risk dissipates. In the 90's, the average price
fell a mere 6%, but took ten long years to set new highs.
Homeowners' growing realization of
imminent falling prices and deteriorating wealth effect will
not bode well for Confidence.
This factor will stymie robust GDP right through to the end of the
current business cycle in 2017.
If long-term American business cycle
trends hold to form, both economies should trough again in 2017Q3.
Whether this takes the form of a soft or hard landing will depend on
Bank of Canada's monetary policy maneuvers in tandem with fiscal
policy actions at the federal & provincial level.
Bank of Canada & the Federal Reserve
must be very careful with their raising of interest rates during the
balance of 2010 & 2011. Low rate regimes will be necessary to
weather the collateral damage associated with issues discussed and
re-attain natural unemployment rates. With November's GDP
growth rate likely at a mere 0.6% amid fiscal stimulus, it is clear
Mark Carney has been as overly ambitious in his raising of rates
despite our cautions as he was overly optimistic in keeping rates
high in 2008.
It is time to put a hold on future rate
increases 'til inroads are made on nearing full employment.
Curbing inflation is required of course, but his battle against
asset bubbles (real estate) should be delegated to the appropriate
TRI Performance (rev 2010/2/16) ~ In Nov/2009, the TRI was
the first mainstream analysis
the Recovery was exceeding 5% GDP growth rates. But within
mere weeks the Indicator began to already project its serious
December 23rd 2009,
the TRI signaled the first alert of a potential double-dip.
As North American news became worse, the date for a downturn was
accelerated. But then in late April 2010 - all signs of future
negative GDP vanished. Media pundits and bank economists have
continually been behind the curve on all these developments.
Superb accuracy makes
the TRENDLines Recession Indicator (TRI) the premiere composite
leading indicator available.
The dismal activity in 2010H2
represents a significant plunge from the heady 6.2% GDP days back in
January 2010. Because it flies in the face of three months of
fiscal stimulus spending still to be distributed, We are confident
the downturn reflects our March 5th 2010 warnings that Bank of
Canada would have to ratchet back if it raised interest rates too
quickly in light of: a
double-dip in the USA,
an export killing near-par Loonie & an imminent bursting of Canada's
Afterwards Carney raised rates three times.
Only ten months ago, the Central Bank
& the Minister of Finance had assured Canadians that
there is no realty bubble up here.
Then we watched home valuations plunge $22k from June to August!
Recession Backgrounder (rev 2010/10/29) ~
As illustrated in our long term chart, the 2009
Recession was the fourth severest Canadian economic
event since WWII as measured by the TrendLines Recession
Indicator (TRI). Today's revised GDP data
indicates the Canadian economy entered a Technical
Recession in February 2008. This sheds light on
the discussions surrounding the 2008 Election campaign,
when PM Harper and Treasurer Flaherty were adamant that
there was no Recession in play and thus no chance of a
2008/2009 Deficit, whilst the Opposition used anecdotal
evidence to "talk down the economy".
Leading Indicators and GDP exhibited much conflicting
data through the year. Then in December, Canada
suffered a swift and deep plunge right into Severe Recession.
The apparent good economic data (via GDP &
Leading Indicators) of that
critical fourth Quarter was not downgraded by StatCan 'til January
With clarity absent, reporting inaccuracies sent mixed signals and
resulted in the failure of the Conservative Gov't to address the
downturn with sufficient fiscal policy stimulus in their infamous
November 2008 Autumn Fiscal Update.
This mis-read was compounded by actions (or inaction) by the Bank of
Canada, which made no effort to use its monetary policy privilege to
reduce interest rates after March 2008. The Bank Canada
finally reduced rates by 0.5% on Oct 8th 2008, but even then it was only
as part of a concerted effort by six Central Banks to address the
international liquidity crisis. At the time, it was not
aimed at any perceived
Canadian economic softness. Viewing the
it is evident that StatCan has made many revisions to 2008 in the
ensuing two years.
In a final look back
at the recent downturn event, today's revised StatCan GDP data implies
the full economic contraction was 19 months (~ 6 quarters) in length,
with an avg GDP decline of -2.3%.
Recession started in February 2008, escalated to a Severe Recession
in December and plunged to its eventual -7.6% trough in February
before coming to an end in August 2009. In comparison,
the USA event lasted from Dec/2007 to June/2009 with a 7.7% (Feb)
trough. The USA slowdown in the sales of
new home construction & autos
devastated imports from Canada of softwood lumber, auto
parts/vehicles, and the general manufacturing sector.
It is little known that more cars & trucks have been assembled in
Ontario than Michigan since 2005.
As we predicted in Autumn 2008, a Spring recovery for both (new)
homes & cars came as scheduled ... and before any of the stimulus
cheques. Already by July 2009, American New Home sales were up
27% from their Jan/2009 low. Back on August 19th 2009 we declared
that the Canadian Recession had ended in July. StatCan GDP
figures have confirmed the essence of that prediction.