Thursday, February 26, 2009

BMO says "Worst likely behind us"

Every once in a while, one of the Big Banks amaze me with their incredibly useless analysis of this recession.

Today in the G&M, it was reported ("Worst likely behind us: BMO", VIRGINIA GALT, Feb 26)

“Our current view remains that the Canadian recession will be somewhat milder than the past two major downturns … We continue to maintain the view that a recovery will take hold by the end of the year, despite the recent wave of downbeat economic releases.”

However, Mr. Porter said he believes the recession will not be as deep or prolonged as the recessions of the early 1980s and early 1990s for a number of reasons:

“First, interest rates were cut early and often in this cycle and are much, much lower than in the past two downturns…

“Second, stimulative fiscal policy is kicking in relatively early in this downturn.

“Third, corporate balance sheets were in much healthier shape heading into this recession than in the past two cycles.”

And, finally, the 20 per cent depreciation of the Canadian dollar relative to the United States dollar, “will offer some relief to industry,” he wrote.

He added that Bank of Montreal economists now predict a 2 per cent decline in Canada's gross domestic product this year, and project that the unemployment rate could average 8.2 per cent in 2009 – not as high as the unemployment rate of 13 per cent reached in December, 1982.

The recovery, when it does take hold, will be half-hearted and, to some extent, “will be force-fed by this wave of fiscal stimulus that we are seeing around the globe,” he said.

But for the stimulus efforts to work, the United States must first stabilize its financial system, he added.

“If that doesn't happen, of course we have got to start over again with the forecast,” Mr. Porter said.

“We don't need the U.S. consumers to go back to their free-spending ways, we don't necessarily need that. We just need the U.S. financial sector to sort of stabilize and we need their growth to stop falling before we can realistically look at a turnaround in Canada,” said Mr. Porter, who noted that U.S. Federal Reserve Board Chairman Ben Bernanke has also projected that the economy could start to recover by the end of 2009.

My thoughts:

Hmmm, a 2nd half pickup. Wait a minute, didn't this same Mr. Porter look for a second half pickup for 2008 in January of 2008? No one could have seen this coming back in early 2008, could they?

BMO economists aren't predicting a recession for Canada but expect the economy will grind to a halt by the second quarter before picking up momentum again in the second half (of 2008).

But there are positives amid all the doom and gloom, said Doug Porter, deputy chief economist with BMO Capital Markets.

U.S. core inflation remains relatively low, he said, giving the U.S. Federal Reserve room to aggressively cut interest rates if it needs to.

"There's room for Washington to cut taxes or to increase spending," Porter said. "It's not as if policy makers' hands are tied."

Sound familiar? Didn't see the recession coming, huh? This is the problem with most economists and many investors these days: they are relying on the same models that did not see any of this coming. They dismissed anything that happened before 1980 and dismissed the Great Depression as a series of policy errors. What do these esteemed models of Porter say?

1) Porter's model says: Interest rates are low, so the economy will pick up

2) Porter's model says: Fiscal policy is kicking in, so the economy will pick up

3) Porter's model says: Corporate balance sheets are great, so companies will spend and the economy will pick up

4) Porter's model says: The Canadian dollar is depreciating so exports will pick up, so the economy will pick up

5) Porter puts in a ridiculous qualifier on the US banking system so that he can blame it when his forecast inevitably falls apart.

6) Porter says that Bernanke says the US will recover in late 2009. The same Bernanke that said that subprime was contained and that didn't have a clue about any of this?

Porter's points are all true versus the 1980s and 1990s recession. However, he does not point out the negatives which ironically are the reason that many of these "positives" are happening.

Interest rates are low because the economy stinks and there is deflation. Low interest rates are a symptom of this fact.

Public money (Fiscal policy) is kicking in because private money is not spending.

Corporate balance sheets were in relatively good shape before the recession hit. However, consumer balance sheets are absolutely horrible with record debt levels and leveraged against bubblish assets such as housing.

The Canadian dollar is depreciating due to falling commodity prices (among other things). Canada needs those falling commodity prices like we need a hole in the head. Exports are tanking as world demand for everything is falling.

Porter also conveniently omits that there was no global stock market crash in the past 2 recessions. There was no global banking panic. There was no global housing crash. There was no fear of deflation. There was a far less leveraged consumer. Commodities did not drop by 80%. The demographics were more favorable.

I guess all this works in fantasyland where you get to use the same discredited model that makes symptoms of a disease appear as cures.

I hope when this recession/depression is over, that the economics community is thoroughly discredited. (I doubt that it will. I also realize that there are a handful of great ones such as Roubini, Paul McCulley, etc...It is the other 99% that I take issue with. Keep in mind that the consensus of the famous Blue Chip Economist survey in the US has failed to ever correctly predict a recession.)

Until the future arrives, I accept that Porter could be right and I could be wrong on this, and I also accept that one day there will be a recovery. However, on this issue, as Charles Barkely once wrote "I may be wrong, but I doubt it..."

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