Friday, August 8, 2008

Stormy Summer 2008: What's the Winter Outlook?

For those of us in Quebec and Ontario, the weather this summer has been incredibly stormy with little in the way of real summer weather.

1) The economy has been just as stormy with the news today that the economy "unexpectedly" (you'll keep hearing that a lot) shed 55,000 jobs and even worse, the private sector shed 95,000 jobs. The worst loss since 1991 (hmm, where have we talked about that year before?).

2) May GDP was "unexpectedly" negative.

3) June housing was negative.

4) Today, the Canadian dollar went below 94 cents, it worst week since 1971!

Have I depressed you enough? Unfortunately, the situation is what it is. Better to accept it and plan accordingly, I believe. There will be a recovery and a new bull market one day and I believe that it is better to preserve capital and pay down debt now.

Let me address the four points above, none of which should surprise (the few) readers of this blog:

1 & 2) Despite believing for over a year that Canada was headed to recession (please see my February posting)

The 1990/91 recession and the slow growth that followed were incredibly brutal. Canada had a very rough time and our economy underperformed most of the G7 during that fairly mild US recession. In 1990, we had 10% real interest rates, a housing bubble bursting, a transition to free trade, enormous budget deficits and the introduction of the GST. On a relative basis (to the US), we won't underperform this time. The only problem is that this time, I believe the US is in for a much longer and deeper recession. Overall, I don't think that this one will be as bad as 90/91 but given all the possibilities inherent in the biggest credit crunch in many generations, nothing can be ruled out.

As for unemployment, this report looks like a catch-up for all the positive months thus far this month. Perhaps July's losses were overstated (and earlier months were overstated) but as I said back in April things changed big-time in spring in the job market in my neck of the woods.

The economy is likely in recession in GDP terms. To all this "jibba jabbah" talk that GDP doesn't measure price changes : what happens when commodity prices sink (as they did this week)? The effects of the commodity mini-crash this past month or so have yet to filter through the economy. Unemployment will rise. Don't buy the fact that the unemployment rate went down in July.

3) If 55,000 jobs were eliminated, that could not have helped housing in July. Expect the numbers to worsen on their own. Throw in a recession and plunging commodity prices in the areas that are still hot (Sask, Nfld)...yikes. The only wild card is that demand is likely to pick up ahead of the October 15th deadline for curtailing "overprime" loans.

4) I wrote back on April 1st:

I think that the Canadian dollar will likely fall to 92-94 cents over the coming months...
Now that we are at 93-94, we probably get a short term bounce as the loonie is incredibly oversold. I sold some small US dollar money market holdings back into Canadian today but I think that given how easy the loonie fell this week, the downside needs to be revised lower. Have to do the research on this (I was waiting for this target to be hit, and the speed of the decline this week from 97 did not leave me time for this). Gut feeling is we go still lower (upper 80s to 90) as commodities continue to implode, but first we bounce.

Winter Outlook:

Markets remain choppy for August into mid September. Commodities bounce a little mid/late August and sell off again in early September. US and world markets peak in mid August, pull back in late August, rally into mid September to test August highs.

Then we plunge into mid November as the credit crunch really takes hold, the US economy plunges and recession is accepted by all. There is a chance that we get a slew of bank failures at the same time and systemic risk becomes a concern.

Canadian, US and European economies in recession or hard landings. I plan on conserving capital and shorting at opportune times.

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