Revisiting predictions: Commodities still hanging tough, public sector unions under fire, European debt crisis intensifies, interest rate predictions

Revisiting predictions

Now two full months into the new year, it’s worth stopping for a moment and taking stock of how things are shaping up.  You’ll recall that I made some predictions for 2011 back at the beginning of January.  Two months into the year and it is now worth stopping for a look.  Overall I think certain trends are shaping up, though others have yet to materialize, most notably a commodity price retrenchment and the start of a housing market correction (though the impending new mortgage rule changes will distorted the market for another couple weeks).

 

Commodities:

Silver and gold still going strong, but so are all commodities.  I did say that I expected silver and gold to be water cooler talk by the end of the year.  With silver up a remarkable 20% on the year (and up closer to 35% from the February low), it should certainly catch the attention of many.

Despite my outlook on gold and silver, I expect a significant pullback in industrial commodities at some point this year, but so far it hasn’t happened.  However, my rationale for the slowing in these commodities is increasingly gaining mainstream attention.  I’ve highlighted the fact that China (one of the big drivers of the commodity boom) is arguably one of the most dysfunctional economies on the planet and that their model for growth is extremely unsustainable.  Now Canadian Business has weighed in on this very topic:  China’s Coming Collapse.  It’s a great read.

The big unanswered question is how long can China keep all the balls in the air.  A month?  A year?  A decade?  Hard to know.  But I am certainly concerned about their growth model which is highly oriented towards growth via construction (a shocking 60% of GDP), even when that construction involves building entire empty cities.  A hard landing in China remains a potential game changer for the global economy.  It bears your close attention.

 

Public sector unions under fire

In January I wrote the following:

“Austerity begins to rear its ugly head at the municipal and provincial levels.  The big federal austerity drive begins in earnest in 2012.  Public sector unions remain clueless as tensions rise throughout the year.  2012 and beyond will see MAJOR union tension as the axe begins to fall.”

Since that time we’ve seen Dalton McGuinty make a surprising ruling, deeming the TTC an essential service, largely inhibiting their ability to strike.

Perhaps more significantly, articles like these are starting to bring public sector compensation into the spotlight:

We need Scott Walker here– Editorial by the Fraser Institute in the Financial Post\

Reining in public unions– National Post

Facing unions a hard fact in tackling debt– London Free Press

With the federal conservatives closing in on majority numbers in the polls (and in Ontario where Dalton’s approval rating has hit the mid teens) and with a federal election this year increasingly likely, the next few years will be interesting to say the least.  Tensions are set to rise as it is, but even more so with the potential for slowing economic growth as the background behind negotiations.

 

European debt crisis intensifies

I noted in my 2011 predictions that the European debt crisis will intensify and spread to the core later this year….particularly once the realization sets in that ‘too big to bail out’ Spain will in fact need a bailout.  We now find out that Greece has had their credit rating slashed while bond yields are soaring in the PIIGS nations:

Greece 10 year bond- 12.3%

Ireland is a basket case with the 10 year yield hitting 9.5%.

Portugal is increasingly looking shaky as their bond yield moves parabolic.

Portugal 10 year bond- 7.6%

No doubt the big European banks are sweating at the prospects of taking a haircut on their holdings.  This is the reason for the bailouts after all….to preserve the holdings of the big banks and avoid another credit crunch.  But how long can the EU fend off the bond vigilantes amid rising scrutiny of the sustainability of the bailouts?

 

Interest rate predictions

I made a bold prediction in January that the Bank of Canada would likely not raise their key overnight rate this year.  I know this was a massively contrarian position at the time and remains opposite to what most economists are forecasting.  I’ve outlined exactly why I anticipate low interest rates for some time in earlier posts.  However, I’m no longer alone in this call.  Capital Economics released a report indicating that they do not expect a rate hike this year.

While most economists are calling for an April or May rate hike, Scotia has weighed in the prospects that the BoC will hold the line until October.  It is an interesting read, though one factor that is absent from their discussion is the economic impact of a slowing housing market and the pressure it would exert on consumer spending.

Interesting times indeed.  I’ll revisit some more of these predictions later in the year to see how things are shaping up.

Cheers,

Ben

 

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7 Responses to Revisiting predictions: Commodities still hanging tough, public sector unions under fire, European debt crisis intensifies, interest rate predictions

  1. jesse says:

    On the interest rate front, if high levels of construction activity continue through the spring, particularly in Ontario, the Bank of Canada is going to become increasingly worried that capital is being put into an asset class that is already overinflated. The government has already “discharged their ordinance” this year by tightening CMHC loans. If this policy change does not measurably show up through decreased construction activity and a trend towards deleveraging, the Bank may need to step in sooner. I expect they won’t be able to gauge this until August at the earliest.

    Another thing to consider is that the US is setting up the stage for potential rate hikes starting about a year from now. This has been blogged about on CalculatedRisk and we should consider the implications to Canada. The US is currently planning the unwinding of its quantitative easing plan (QE2) and will start selling off assets going into the summer. Assuming the economy and employment continue to grow, it will start hinting at rate hikes in the summer, with actual rate hikes coming near the end of the year if not in 2012.

    What will Canada do under this situation? Its economy is arguably much stronger than the US’s.

  2. Mike says:

    Ben-

    Any good source to read up on bond markets/yields and how they set interest rates?

    Mike

  3. Paul K. says:

    Great read Ben.

    How do you expect the housing market to correct if the rates do not go up?

  4. Don says:

    Paul , because of peak debt. At some point even without rate increasese it will happen

    • TS says:

      Demand has been pulled forward. Ontario is at 72% homeownership. Far too many kids jumped into condo’s downtown on a shoe string budget. Balance of condo purchasers are speculators. Not much of a market left to sell to. The new single family home industry is dieing a slow death. Too expensive. I read where most of the 40 year mortgages went to existing homeowners who bought a more expensive home. That drove prices up big time. A significant labour pool of construction workers is going to be affected later this year. Extraordinary infrastructure funding programs are expiring. This will affect the commercial construction sector and some manufacturers big time.I suspect we will see a lot of underemployed if not unemployed people in this sector in the next year and a half. New housing needs employment growth. Not looking good for Ontario. Lack of demand will pull prices down. Interest rate hike would cause a crash. Carney has to be real careful. A interest rate hike would further harm our manufacturing business. Higher commodity prices hurt Ontario and Quebec manufacturers. The last two years of job growth were primarily construction and government. Where is job growth coming from in the future is the key? Outsourcing killed Ontario and continues to. If employment falls, home values will decrease. The so called recovery is walking a very fine line. The squeeze is on.

  5. Pingback: Leestip: De Chinese Bubbel (Canadian Business on China’s bubble economy ) | MRWONKISH.NL

  6. Chad in Burnaby says:

    Interesting news from China this morning “China reports largest trade deficit in 7 years”:

    http://www.chinadaily.com.cn/bizchina/2011-03/10/content_12150240.htm

    Apparently it’s the moon to blame: “We believe the trade deficit is likely to be a temporary phenomenon distorted by the Lunar New Year…” said Yu Song and Helen Qian, economists with Goldman Sachs.

    However, Xu Biao, economist with China Merchants Bank in Shenzhen says “”It is definitely not a good sign. The size of imports is already read as a measure of domestic demand. But now imports have dropped significantly, and it points to a serious weakening in domestic economic activity.”

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