Deflation in the US
The January 2011 edition of the Bank Credit Analyst has been released (hat tip to DR for the head’s up). For copyright reasons I can’t link to it, but I will post a few interesting quotes. For more info on BCA Research, check them out here. They are a well-respected economic research firm. This latest issue provides an outlook to 2011. Some key quotes:
“Policy settings look very inflationary, but economic conditions are more deflationary with large amounts of slack in labour and goods markets.”
“…Inflation risks will increase over the medium term”
As I have been saying all along now, the inflation fears are a ways out. It’s not until debt deleveraging runs its course, credit demand picks up, and velocity of money increases will we see significant inflation. That does not mean that commodity prices cannot rise in the interim. If that concept still confuses you, read this. When true monetary inflation will rear its ugly head is anyone’s guess, but my guess is at least 2 years out, barring a kamikaze approach by the Fed and Congress.
“Fears that China is an accident waiting to happen are misplaced”
We’ll see about that one. Camps are certainly divided. China is a potential economic powerhouse, but they have structural issues to deal with first: Primarily the fact that 60% of GDP is construction and the fact that their per-capita income is still below $4000 USD annually. The Chinese middle class is not yet set to replace the US consumer as the global consumption engine, but that time is coming. I have my concerns about the near-term.
Austerity in the US….Coming to a province near you!
Meredith Whitney was on 60 minutes last week discussing, among other things, the “day of reckoning” for many American states. She predicts that 50 municipalities will be facing severe cuts or outright default over the next few years. Here’s a part of the interview. It also features one of the last true fiscal conservatives on the planet, Mr. Chris Christie. On a related note, the Business Insider looked at 16 cities in particular that would be under the austerity knife over the next few years. Scary stuff. The days of the government providing a plush safety net for its citizens may well be drawing to a close. Time to make your own parachute!
Lest you think this is an American-only problem….
With Flaherty set to lower the spending boom and with a populace that is arguably ready to embrace fiscal prudence from their elected officials, the provinces and provincial and federal public sectors had better get a clue and position themselves accordingly.
US housing market set to rebound?
Not so says the Dallas Fed in the US. In a report titled, “The Fallacy of a Pain-Free Path to a Healthy Housing Market“, the Fed, of all people, notes the following:
“Prices, in fact, have begun to slide again in recent weeks. In short, pulling demand forward has not produced a sustainable stabilization in home prices…”
No kidding! Wow I see parallels with Canada in 2008-2009 when our housing market was stabilized by cratering interest rates and getting every 20 year old with a pulse to jump in to the market in order to take advantage of historically low interest rates and zero down mortgages (don’t kid yourself…they’re still around) as they were enticed, and continue to be enticed by offers like this:
Where will the next jump in demand come from when sales remain weak through 2011 yet inventory begins to build? Homeownership rates are at all-time highs. Immigration? PLEEEASE! Total household formation has been running at 175K steady for several years, yet housing starts have been well above that since the recessionary lows until just earlier this year. Back to the Fed article…
“With nearly half of total bank assets backed by residential real estate, both homeowners on the cusp of negative equity and the banking system as a whole remain concerned amid the resumption of home price declines…”
And with the renewed price pressure on US real estate, expect consumer demand to remain tepid. As the US consumers go, so go our exports.
Risk to Canada’s economy
After posting my own gloomy(ish) Canadian economic forecast last week, the IMF has issued their own warning for Canada:
“(The IMF) gave the country high marks for its comparatively solid fiscal standing…(and) resilient banks”
Let me translate: The IMF gave the country high marks for removing mortgage lending risk from the banks and placing it on taxpayer shoulders. It also applauded their ability to get their consumers to bury themselves even further in debt, thereby stocking the ‘recovery’.
I guess that passes as good news today.
“…The central bank should keep interest rates low and could even cut rates if needed…. “We think it’s important to remain vigilant to any risks that could emerge. After our discussions in Ottawa and Toronto we are confident that the authorities are very much on the same page with respect to that”
“Monetary policy should be the first line of defense if the outlook deteriorates, given the room to ease quickly, although fiscal policy has room to respond as well in a downside scenario.”
Let me reiterate my controversial and contrarian stance that we will not see any rate hike for the foreseeable future and I would be willing to bet that we will even see emergency level interest rates once again before a serious round of rate tightening.
“The report said growth would be muted in the second half of 2010 and in 2011 as household debt has run up to high levels, housing markets are cooling and fiscal stimulus is waning.”
Yup. Of course you already knew that.
“Ottawa could curb borrowing by making it tougher to take out a mortgage, the IMF said. “At this point, probably the appropriate thing to do is to wait and see how the credit cycle matures but one option would be to take more steps on the mortgage market”
I’d love to see it. You all know my position on whether or not amortization rates should be tightened. I’d love to hear the screaming by the mortgage brokers and real estate industry who would quickly decry the hand of the government in meddling with “free markets”. What a sweet sound it would be. I will say that I’d be surprised to see much by way of mortgage tightening without a majority government in Ottawa. But we can hold out breath and wish.