The Bank of Canada (BoC) offered a “bleak” outlook for the Canadian economy yesterday, placing our economy on the cusp of technical recession with 0.4% growth in the next two quarters. Slower growth will result in job losses, a reduction in household wealth and falling house prices.
Although, after today I wonder if Mr. Carney would be ‘singing’ a different ‘tune’ since the U.S. futures market has plunged by its daily limit this morning and European and Japanese stocks are down between 7% and 10%. The MSCI World Index was down 4% (although, North American markets were up yesterday based on initial optimism and much of that optimism is gone this morning).
Stocks are set for another sell off today based on more bad economic news. Lower sales and profits at automaker (Toyota reporting a large drop in sales) and technology (Sony) companies heightened concern that the financial crisis is infecting the broader economy and is not just isolated in real estate and finance.
The bank governor Mark Carney said “the sky is not falling, the sky is still there, the sun is still coming up every single day and the Canadian economy is still functioning.” The forecast is a very sharp downgrade from his statements July of this year.
A technical definition of a recession is two consecutive quarters of negative Gross Domestic Product (GDP) growth. GDP measures the aggregate spending or money movement within an economy.
I find it interesting to note that the Canadian Central Bank has already downgraded their forecasts four times this year. In my opinion, they will adjust it again because Canada will hit a technical recession (at least that is what capital markets are pricing into their securities).
Mark Carney sees “Canada not falling as far as other countries fundamentals, including job growth, household wealth, housing and even the fiscal soundness of governments and banks.” In addition, he stated that “Canada won’t come out of the malaise until 2010 with a return to more normal global financial conditions and growth will rebound strongly to 3.4%.”
As mentioned yesterday, the Canadian federal government has also agreed to temporarily backstop bank borrowing which will ensure Canadians have access to loans for their personal consumption (to buy cars, homes and other big ticket items). In addition, this will keep Canadian banks at parity with their global counterparts.
I think “Mark is on an island” and he is very inconsistent with the overall consensus of the market (not unlike the Prime Minister during the election). These people are not keeping up with the pace of change.
In the last six weeks almost every single statistic that has been released (auto sales, unemployment, consumer spending, TED spread, LIBOR rates, oil consumption, frozen credit markets etc…) has been worse than anyone predicated or expected. These events have put the “breaks” on growth worldwide (I mean it feels like things have just stopped).
“The global financial crisis has been constantly spreading and worsening, creating a severe shock to global economic growth,” Chinese Premier Wen Jiabao told an Asia-Europe Meeting of 27 European Union member states and 16 Asian nations yesterday.
Oil prices rose above $67 yesterday as the Organization of the Petroleum Exporting Countries (OPEC) prepared to cut production at their special meeting this morning. Iranian oil minister Gholam Hossein Nozari called on the cartel to cut by 2 million barrels a day (2.5% of global demand) in an attempt to stop a steep slide from their peak of $147 hit July of this year (well over 55%). Oil prices are down more than $40 per barrel in the last month.
This morning, OPEC settled on cutting oil production by 1.5 million barrels per day which should not risk prolonging a slowdown in the demand for oil (you still need people to consume oil and now is no time to be pricing oil out of the market). Oil prices dropped by $2 to $65 (a drop of more than $85 from its peak) this morning – “caught in the downward draft”.
The MSCI All-Country World Index, has dropped 47% this year in local currency (although, the Canadian dollar has also dropped by 20% thereby, Canadian investors have had their losses offset by a decline in the Canadian dollar) as frozen credit markets and toxic real estate assets led to $659 billion of write downs and credit losses at banks. This has led us to this recession. About $30 trillion of market value has been erased from global equities in 2008, according to data compiled by Bloomberg. The drop has been led by the emerging markets which have had their own ‘sovereign’ issues as 5 (at last count) countries are seeking help from the IMF to help them avoid bankruptcy. They are potentially considering ‘linking’ their currency to the $US dollar.
I’m a bit of an optimist, I don’t think we are going to hit the intra day lows that we hit two weeks ago today but I think we are going to test those lows which means stocks could drop by as much as 8 to 10% (depending on which stock market you are looking at).
However, I still believe based on government intervention and current depressed valuations for stocks (which are justified) that credit markets, capital markets and the economy will get better.
It will be painful and it will take time, this is a 3 to 5 year ‘road’ that we must travel and in the short-term things will remain volatile (expect to see my favourite index CBOE VIX Index to spike today since investors are very nervous) and very unpredictable.
In short, we are seeing extreme risk aversion and deleveraging of risky assets – more sellers than buyers. The market is just feeding on itself and pushing things lower. Investors lack confidence in the key catalysts that will “pull the global economy out of a recession.”
I do know that when things snap back (think last week Monday/Tuesday when stocks jumped 10%) it will happen quickly but it will be a long road back to record highs (48 out of the 50 biggest single day price increases in stock markets happened during the Great Depression).
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
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