Tough decisions for Canada; Shilling sees deflation in US

Tough decisions for Canada

Could it be that our Progressive Conservatives are actually returning to their roots?  After running the largest peace-time deficit in history, the Harper government is now actively trying to prepare Canadians for the difficult fiscal times ahead. Born again Conservatives?

Perhaps.  But more likely the Tories are simply seeing the writing on the wall, now that the traditionally left-leaning Toronto has embraced a fiscally minded mayor.  Or perhaps the cautionary tales of Ireland and Greece are finally ringing in their ears, and they now see that our future is one of austerity, be it forced or voluntary.

Regardless, it is nice to see that people in Ottawa are finally getting it:

Tough decisions ahead to avoid fiscal trouble: Flaherty

“The country’s top financial policymakers warned Canadians on Sunday to brace for tough decisions and “very big challenges”

“…The Conservative government is determined to cap program spending so Canada can return to a balanced budget position and avoid the turmoil Europe is undergoing.”

“(Flaherty) acknowledges this won’t be a popular decision, with certain segments of the population and his political opponents.”

I’m not so convinced.  I think people are starting to get it.  Stimulus spending has gotten us no where.  I think the secular shift back towards fiscal prudence and frugality at all levels of society has already begun.  The future political climate should favor fiscal conservatism.  The implication for consumer spending and the broader economy suggests a weakening in our economy, particularly once wealth effect spending and growth in HELOCs slow as our housing market inevitably cools.

“The government has forecast returning to a balanced budget by 2016, through reducing spending growth in key areas and allowing the two-year, $48-billlion stimulus plan to expire as planned at the end of this fiscal year.”

“His speech in Oakville is expected to draw clear boundaries for his political opponents about what the minority government will and won’t undertake in the next federal budget”

If they can hold to this, and if attitudes continue to shift as I think they will, the rise of a truly conservative party in Ottawa will spell big trouble for liberals everywhere.

 

Shilling sees deflation in US

On the heels of the abysmal US core CPI readings, deflation prognosticators are crawling out of the woodwork.  Now if you’ve been reading this blog for any length of time, you’ll know that I believe that deflation will be the dominant force over the next few years.

Ultimately inflation will rear its ugly head, but not before debt is payed off and/or defaulted on to the point that consumers can once again access and spend all the idle reserves sitting in the bank vaults.  As explained before, the recent rise in some commodities (which are showing renewed signs of weakness) is likely nothing more than speculation in the commodities markets.  With China seemingly more intent on reigning in inflation and credit expansion, and the ongoing Euro saga forcing a capital flight back towards the USD, it’s difficult to see where the near-term strength will come from.

Gold and silver will continue to do well in real terms as they are increasingly viewed as currency, which always expands its purchasing power during times of deflation.

I’ve also advocated increased bond holdings in your retirement portfolio , particularly at the long end of the spectrum as part of a balanced portfolio.  I have to admit that the recent sell off in bonds as Ireland has been nearing a bailout has me questioning my thesis that a Euro-zone break up or ongoing debt issues there would be bond bullish in countries like Canada.  I’ve been giving it more thought for sure.

Gary Shilling has recently weighed in on the issue:

Contrarian sees salvation in U.S. Treasuries

“Way back in the early 1980s, when nearly everyone thought high inflation would last forever, Mr. Shilling was one of the first to warn that the world was shifting to disinflation.”

“Mr. Shilling is convinced the United States is about to slip into a lengthy period of weak economic growth, accompanied by 2 per cent to 3 per cent annual deflation – an unusual situation in which consumer prices fall steadily.”

“In this environment, forget about big gains in the stock market. Equities will produce anemic returns not much more than their dividend yields.”

“He shrugs off fears about quantitative easing because the Fed’s actions to date have only created excess bank reserves. It would take aggressive lending of this money by banks to get inflation rolling, and Mr. Shilling thinks central bankers would then take offsetting action to maintain price stability.”

EXACTLY!  This is what many people are missing.  It’s not until the velocity of money increases substantially will we see sustainable large-scale price increases.  That’s not to say that speculation can’t drive up prices in the interim, as seen in the latest COT report by the CFTC, but falling commodity prices are much more likely going forward.

“He also contends that deleveraging – the writing off and paying down of debt – is causing an overall lack of demand, which is also deflationary.”

Among the investments to be favoured, according to Mr. Shilling, are high quality bonds, stocks of stable companies that pay meaningful dividends, food and consumer-staples producers, rental apartments and the U.S. dollar.

To that I would add high quality utilities, health care, and preferred shares.

Cheers

Ben

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One Response to Tough decisions for Canada; Shilling sees deflation in US

  1. Pingback: Deflation, austerity, and housing blues in the US; Risks to Canada’s growth from the IMF | Financial Insights

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