Have you ever been driving along when all of a sudden a light comes on your dashboard? What do you do? Do you keep driving and just hope it corrects itself with no effort on your part and no ill effect? What if several lights come on simultaneously…and there’s someone in your passenger seat telling you to deal with the problem before it blows up in your face?
Sometimes I feel like I’m the dude in the passenger seat. Don’t get me wrong, I fully realize that there are some fantastic blogs out there doing their best to spread the same message. It just amazes me how people can hear the same warning for so long, see it play out in the broader economy, hear what is coming next, and still choose to do nothing about it.
So here I am again pointing out those flashing lights on the dashboard: Oncoming deflation that will ravage assets, particularly real estate; a Canadian housing bubble that is way out line with historic fundamentals and is deflating as you read this; demographics that tell us that peak consumption and peak credit is now in the rear-view mirror.
By this time next year Canada will be back in recession. House prices will be down at least 15% year-over-year. Consumers will stop borrowing against their shrinking home equity. Credit will dry up. Jobs will be disappearing.
So what are you doing about it?
Still not so sure about those blinking lights? Let me point them out for you using articles from the past few days:
“The inflation reading released Tuesday reinforced that uneven demand is keeping a lid on pricing pressures in many sectors of the economy, underscoring how the tepid U.S. and global recoveries are causing Canada to sputter, too.”
Now I’ll admit that I have been shocked that Mark Carney has raised interest rates in an economy that is showing clear signs of slowing. Central bankers really only have one ridiculous playbook: Stimulate consumer demand when there is a recession. Get them to take on more debt to buy crap they don’t need, thereby pouring money into the system and creating jobs. Knowing that, there are really only two things that could be going through Carney’s head:
1) This pseudo-Keynesian-stimulate-at-all-costs approach is ridiculous and is setting us up for economic failure. Therefore, interest rates should be set more to market rates, thereby encouraging savings and long-term growth (this is my position by the way). I’d say the odds of Mark having had this epiphany are approximately 1%.
2) Let’s set the stage for another interest rate crash. If we can slowly raise interest rates until the bottom falls out of housing and we’re back in a recession, perhaps we can crater them back to emergency levels, stimulate demand as people will be saying, “interest rates have never been this low…..better buy now!”. It worked during the miracle reflation of 2008-2009. I’d say this is a far more likely explanation.
This is why I’m quite comfortable adding to my positions of interest rate sensitive investments in a time when most analysts are predicting that the overnight rate will be back to 3% by 2012. I’m overweighting long bonds, long dated strip bonds, fixed rate preferreds (non financials), and high quality corporate bonds.
When I mentioned above that the economy is clearly slowing, here are some examples of what I meant:
“Confidence about the Canadian economy faded this month, with fewer people saying they plan to make a major purchase in the coming months amid growing concern over household income and employment, a poll said Thursday.”
Let me answer that question before we get to the quotes……YES!
“Canadian consumers are no longer pulling their weight in the country’s economic recovery, reports showed Wednesday, raising the possibility that the economy will shrink in July for the first time since August, 2009.”
“The report showed retail sales for July unexpectedly slipped 0.1 per cent from June as consumers shied away from home-related purchases such as furniture and electronics”
Who exactly did this surprise?
“Growth forecasts are being scaled back on the emergence of weaker economic indicators — highlighted yesterday by a report on the surprise drop in July retail sales. This is on top of soft consumer price statistics that suggest core inflation is slowing, and a bleak wholesale trade report. These factors prompted IHS Global Insight to warn Canadian growth could slow at a more dramatic pace than that of the U.S. economy.”
“Consumer spending that surged in February and March is running out of steam, as is activity in the housing market. Moreover, he said, labour market momentum is waning.”
Let’s talk about that housing market…..that great destroyer of future wealth.
“Every news release brings another indication of the shrinking Canadian real estate market. This time out it’s the Greater Toronto Area where new home sales in August were down 45% from a year ago.“
If that’s a ‘crack’ it’s a crack big enough to drive a dump truck through. In a city struggling with 10% unemployment, falling new home sales don’t bode well for future employment gains, as this chart clearly shows..
Ah yes, the lights are flashing. Are you heeding their warning?