Now What?

After one of the craziest days in recent times (TSX down 1000+ twice, Dow down 800; both cut losses in half), it is time to revisit previous posts with the interest not of gloating but looking forward: 1) I said this on Sept 6th after making a similar warning on Aug 8th:

Cash is king here for all but experienced investors (who can short carefully). Stay out of debt. I saw (and still see) a move to about S&P 1078-1090 (Dow 9Kish?) for this downleg which should last into November, around the time that Barack Obama (or John McCain) becomes the new President.

I added to this on Sept 25th:

I think that there is now a risk that if the market is not saved here, that we go lower than I initially thought (S&P 1080) to S&P 990. This would translate in to roughly 9000 on the Dow.

What do I think now, after we hit 1007 S&P (not quite yet 9K on the Dow): CLOSE ENOUGH FOR NOW.

Barring the low probability (but definitely a possibility here) of a full 1929 or 1987 crash, we may get a bounce. This is not a bottom call. We could still crash or we could rally huge for a few weeks or even months. Very tough to call here.

I am now almost totally in cash (sold off remaining shorts this morning; have a few puts left).

If we had a sharp rally here and certain things that I look for don't "confirm" that rally, then I would even consider shorting again. If things did "confirm", then I would get more invested.

I may even take a small (10-15%) dip in the ocean if I feel like it with tight stops.

At S&P 1007, we were about 36% off the highs. I think we ultimately go lower, but at least at 36% you have finally passed a garden variety bear market.

A severe bear market (1907, 1937, 1973, 2003, etc...) often gets you to 49%. My gut tells me that is where we are ultimately heading to 49% but that could be next week, next month, next year. Not quite sure. My gut also tells me that today was not a bottom and we go lower either in October or November but I'm not quite sure here.

Even in vicious bear markets, you often get multi-month huge bear market rallies (example September 2001 to January 2002) before making new lows. I suspect that we are getting near to a multi-month rally but first we likely have to retest 1007 (could be tomorrow, this week, this month or in Nov/Dec) and not break it.

If we retest and break, then we go to 777ish S&P (which could be via a crash).

Stay tuned...

2) Fed surprise cut

I speculated last week that it would be either on Monday or Thursday. Clearly, it was not Monday. I speculated that they want an up day first (I wrote the post when the market was up huge pre House vote on Friday). Today might have qualified since the market rallied in the last hour....Therefore, Tuesday is fair game IMHO. I would expect 75 points at least since the market already expects 50. In theory, the market should rally but some of that rally likely happened between 2:48pm and 4pm today....

Merrill Lynch gets it!

Merrill Lynch gets it! : (I encourage you to read the report linked here)

Finally, some one in a big position (David Wolf, Chief Strategist, Merrill Lynch Canada) published a report basically saying what this blog has been discussing for a long time:

Canada is no different than the US (or the UK): We are more indebted than they were and our housing market is tracking the US with a 2 year lag (I have discussed this recently as a 1 year and a few months lag, but this is a minor detail). Also, the report says that the lack of a credit crunch thus far in Canada is more a concern than an comfort given the impending housing crash.

In various media articles, CREA, PM Harper and CIBC denounced this view. BMO said that while they are not as pessimistic, they are cautious on housing.

In the G&M today (courtesy of Canadian Press, "Canada could face housing woes, Merrill warns")

Benjamin Tal, an economist with CIBC who has been following closely the ups and downs of the housing industry, said Wednesday he sees no “trigger” threatening Canada's housing and mortgage market.

“To see a crash in the housing market you need a trigger,” Mr. Tal said.

“The trigger in 1989-1990 was extremely high interest rates. The trigger in the U.S. was subprime mortgages. We're still missing the trigger for Canada.”

Good point, Mr. Tal: I agree that a "trigger" is needed.... Hmm, maybe:

1) Biggest credit crunch since the Great Depression
2) A near crash last week in the global stock markets
3) Commodity bubble crash
4) A recession in the US and Canada
5) Falling house prices in Canada feeding into a vicious circle
6) Overprime
7) No more 0%

Take your pick...

While ML the company was nearly toast a few weeks ago, they actually have some good research these days. Their US top dawg, David Rosenberg (a Canadian, by the way) has been correctly talking about the US housing crash for years.

ML is saying what is becoming obvious. The Big Banks are talking their book so they won't say this until it is obvious. While Wolf has been one of the "no housing bubble" people until recently, he has now changed course. Perhaps the recent events at his parent company in the US woke him up to the reality of a credit crunch? Or perhaps Rosenberg has convinced him?

May numbers stink

Longtime readers of this blog may remember that back in late winter, declining sales and slowing price growth were blamed on snowfall.

The results for the three months since then have been even worse even as that snowfall has melted away.

The May sales price increase YoY was 1.1%. This was down sharply from April's 3.2%. As I wrote back in April:

I will venture a guesstimate that the national home price "increase" will be close to zero sometime this summer. And maybe then the CREA will blame the heat...

Summer starts in June and we are already close to zero. Let's wait until the June results to try to confirm my guesstimate (and see if CREA blames the heat).

Watch CREA spin (remember they have a fantasylike 5% price increase for the full year despite all the building inventory)

• "Unlike the situation in the United States, re-sale housing prices in Canada continue to increase," said CREA president Calvin Lindberg.

• "The resale housing market has evolved in just a few short months," said CREA chief economist Gregory Klump. "The record number of new listings means more opportunities for buyers.

Yes, the situation in the United States is worse RIGHT NOW. Yes, housing prices in Canada continue to increase. But, the US did not go negative right away. It took almost a year for prices to go negative once the bubble began to unwind. Our bubble only started to unwind a few months ago!

"More opportunities for buyers". Lovely how they spin a record number of listings as a buying opportunity. Yes, there are more houses available and possibly better deals than a few months ago, but this is like saying that internet stocks were a good buy one month after the dotcom bubble began to burst. The housing bubble has taken years. It will take at least a few years for house prices to remove the excesses. Not a few months....

And remember that this housing bubble is unwinding despite record oil prices (Calgary and Edmonton are now the 2 weakest markets), declining interest rates and a strong loonie and new record highs on the TSX.

It will be interesting to see the effects of this week's sharp run up in mortgage rates on the July and August numbers. I think that a negative number in either July and/or August is quite likely. And then, you may (just maybe) start to see articles in the mainstream papers similar to what you've read here since the beginning of the year.

Now, can we ask the question again?

I asked the question back in February: Did we go into recession in December?

I am still waiting for the G&M or Financial Post to ask this question.

Today we got news that February GDP was -0.2%. On April 1st, I stated that based on Dec-Jan data, it appears that the economy was basically going flat. So now we can make it 3 months of basically no growth.

Can we at least start to ask the question, and also ask: If we are at zero now, and then the housing bubble and commodity bubble only began to deflate in March, how do we avoid recession?

G&M? FP?

The Chain of Events 2007-2012

This is my big picture view of how this housing crash might play out. I am in the housing bear category as I believe that the massive increase in prices since the mid 90s would likely burst on their own. Add to the mix a global credit crunch and a Canadian recession and things could get real ugly real fast.

1. Housing Affordability declines (2007) as prices and interest rates rise. In the early part of this decade, rising prices were completely offset by generational lows in interest rates. Also, housing in Canada suffered through some lean years for much of the early 90s as the 1989 housing bubble popped and Canada suffered through a brutal recession (remember Kim Campbell saying that inflation would not drop below 10% in the 90s?). In the past few years, prices have continued to rise, while interest rates have gradually increased. Housing affordability is now at its highest since the 89/90 bubble years.

2. As affordability declines, house sales slow down, price growth slows, inventory builds. (Early 2008) As affordability declines, buyers either buy smaller, pay too much, rent or stay in their current homes. House sales slow, while inventory build due to continued new home construction and lower sales. Prices continue to rise but the momentum of the increases slow down. Financing has become increasingly dubious as 40 year amortizations are all the rage. This allows buyers to take on more debt and lower payments.

3a As inventory continues to build, certain markets begin to slow dramatically and prices actually fall. (Mid 2008?) Inventory building allows balance to return to the market and buyers have more selection. Some of the hottest market reverse as prices rise to unfathomable levels (Calgary & Edmonton?). Lenders begin to tighten their financing as they worry about some of their boom time lending practices (no down payments, low rates)

3b Making the situation worse, a global credit crunch causes most or all of the 6 main Canadian banks to cut the financing available. (Mid 2008?) 3 of the 6 main banks are already having problems (NatB, CIBC, BMO). I would be surprised if at least 1 or 2 more don't have similar problems in the upcoming months. Due to the credit crunch and an economy either near or in recession, bank mortgage lending dries up. Already mortgage rates have creeped up (despite the BoC cuts and drop in bond market yields). In addition, 3a causes banks will begin to ask for higher down payments.

3c The slowing economy leads to higher unemployment and salary freezes. (Mid 2008?) With a slowing economy, companies begin to lay off and institute hiring freezes. Bonuses are not paid. Salary increases are lowered. Consultants and other self-employed individuals lose business. These factors cause people to cut back their housing needs and in some cases sell their houses.

4 A vicious cycle ensues (Late 2008 into 2012?). 3a, 3b and 3c coincide at the same time to pop the bubble. Demand for housing is cut by high house prices, lower affordability, lower mortgage lending, tight access to credit, unemployment and declining incomes. Supply of housing increases as inventories build due to the drop in buyers. Also, new listings can increase (and thus supply) due to unemployment and foreclosures as well as sellers who want to sell before prices fall.

Prices begin to fall precipitously due to lower demand and higher supply. Once prices begin to fall, buyers tend to wait. Houses take a long time to sell as sellers are reluctant to drop prices (remembering bubble prices/not willing to take a loss). Inventories continue to build....

5 Eventually, prices bottom (2012?). Eventually, prices drop to such a low level and inventories fall as the low prices attract enough buyers. As time goes on, a new generation of house buyers enter the market. I have chosen 2012 but it could be a year or two sooner or later. These things take time. Nominal prices finally begin to creep up. However, it could take a decade or more for homes to regain their real (not nominal) prices of 2008.

Recession Fears Over: Canadian Economy Soars in January

Yup, it's official. Now that Canada's economy grew by 0.6% in January, any fears about recession in Canada are over right. After all, 0.6% is actually about 7% annualized. That is the strongest growth since April 2005. Heck, a new boom has started!!

Wait a minute. January did grow by 0.6%. However, December shrank by 0.7% (8% annualized). Clearly, monthly figures have too much noise in them, as both 7% growth or 8% contraction are not sustainable in the current environment.

Let's just conclude that in the December-January timeframe, it is likely that the Canadian economy was stalling out near 0% (if two months can be used as a good indicator, if the two months are averaged out and if these numbers are not significantly revised in the future).

Therefore, I will say it is premature to conclude whether or not the Canadian economy started a recession in December. I think it did but I will keep an open mind about it.

Note that on March 31 (Jan GDP release date) the Canadian dollar sunk despite the "strong" January GDP likely due to the continued sharp sell-off in commodities. The falling Canadian dollar may help the manufacturing sector a little but the move down to 97 cents is much too little and way too late. Falling commodity prices are likely to hurt the Western economy if this implosion continues, as I think it will. I think that the Canadian dollar will likely fall to 92-94 cents over the coming months, but once again "too little, too late" to save the economies of Ontario & Quebec.

Positions in HGD & HOD, Can & US cash

At least TD and the G&M seem to be paying attention

From G&M today:

http://www.reportonbusiness.com/servlet/story/RTGAM.20080318.r-credit-inflation19/BNStory/Business/home
Canada begins tracking U.S. into slump, Heather Scoffield

It cites TD Don Drummond, chief economist for TD, who is a top economist in Canada, and one of the few that writes interesting stuff, IMHO. He states the Canada is tracking the US economy perilously close to recession. He expects Canada to register a negative GDP for Q1 and an ever so slightly positive Q2. TD even was talking about a negative December GDP before it was confirmed by Stats Can as a negative 0.7% (http://www.statcan.ca/Daily/English/080303/d080303a.htm)

TD, you are the new "go-to guy" in this recession/slowdown!

I asked this question last month (http://canadahousingcrash.blogspot.com/2008/02/did-canadian-recession-start-in.html) and nothing seems to have improved since then.

While that may end up optimistic, in my view, especially if the commodity markets implode (http://canadahousingcrash.blogspot.com/2008/03/commodity-markets-imploding.html), this is at least a realistic scenario.

Most Canadians haven't felt like a recession is here as consumer spending has remained strong. It is the export/manufacturing sector that is feeling it. Westjet and Air Canada claim to have not felt any impact yet (http://www.reuters.com/article/marketsNews/idCAN1823835120080318?rpc=44). The TSX prior to this week had bounced back nicely from the January mini-crash and outperformed the US markets. That may have changed this week! The Canadian real estate market has remained strong. That may be changing as we speak.

I think that the impact will begin to be felt very soon, especially if the TSX continues its recent slide.

Now, if only the other 5 banks and the mainstream media would wake up to the fact that Canada is not decoupling from the US and start considering this possibility seriously. The Bank of Canada is awake as shown by the 50 basis point cut earlier this month.

Positions: HGD, HXD, GLD, gold mutual funds, DBA, DUG

Now it is the snow!

This is Canada. With the exception of a small southern part of the West Coast, it is cold for about 6 months a year. Sometimes, it is brutally cold for weeks. It snows. Sometimes, it snows a lot. Someone should tell this to the CREA (Canada Real Estate Association).

Unit sales dropped by almost 10% versus February 2007 while new listings rose by 12%. Therefore, on the surface, supply increasing and demand decreasing. Could this be the long awaited bursting on the Canadian real estate bubble? Nah, it's just the weather?

“Snowfall in Toronto made it tough to show prospective buyers, and tough to process a listing,” said CREA President Ann Bosley. “It was one of the toughest months ever weatherwise for REALTORS® in Toronto.”

OK, we all know what happens in Toronto when it snows (remember January 1999 with Mel Lastman's army call-up). Well, then the West and Newfoundland stayed strong with $110 oil and record wheat prices, right?

Activity also softened on a month-over-month basis in Edmonton, Vancouver, Calgary, Saskatoon, and Newfoundland & Labrador.

Let's see what happens in the upcoming months. It is dangerous to extrapolate on one month's data. Let's see if the weather is used as an excuse again. Hmm, March was snowy again, in April there were floods because of melting snow, in May, it was rainy. In June, it was too hot....

The market will ultimately go where it wants to go regardless of the weather and what the CREA or I think. I believe that it will follow the US real estate market to the downside. The Canadian real estate market appears to be slowing down with inventories building (higher listings and lower sales equals higher inventories). This is in spite of the large interest rate cuts, $110 oil, record commodity prices, full employment and minimal contagion from the US problems thus far.

What happens if we get a full bear market, falling commodity prices, higher unemployment and a US and Canadian recession, as I expect? Just remember, the CREA or CMHC will never tell you that the real estate market is overvalued. They will never tell you that house prices will fall.

Prices have doubled in most Canadian markets since 2001, mortgage rates have increased over the past few years, the US real estate market is in a depression, the stock market is likely in a bear market, the population is aging, the US and Canadian economies are either in recession or near recession and a global debt deflation is underway.

Canada will be just fine. Housing will increase nicely at 5%. If you believe that, I have a few condos in Florida to sell you...

The Tory Deficit of 2008/09 and the end of Harper as PM

In the interest of full disclosure, I have never voted for the Tories, I hated Mulroney and I am not a big fan of Harper (although he is doing a decent job). I think Flaherty is a solid Finance Minister and while I believe that the GST cuts were stupid, I don't think he would have proposed them. That was a Harper political decision. The income trust decision was wise although it was a political mistake that they campaigned against them.

I have voted for the Liberals traditionally although I am a fiscal conservative by Canadian standards, I hate their National Daycare programs and I do not like the way Dion is shifting the party to the left. I prefer the conservative economic policies of the first 7 years under Chretien.

Canada is headed for a deficit and this could spell the end of Harper as PM.

PM Harper is a brilliant man who is always one chess move ahead of his opponents. However, this time, either he is thinking three or four moves ahead or he is making a serious miscalculation. Canada is on the brink of a recession and he had a brilliant chance to have his government fall with the February budget.

The official reserve in the February 2008 budget is for less than $3 billion. In addition, I am sure that Flaherty has a few billion hidden away as well. However, the margin for error is probably about $5 billion + or - a billion. If Canada goes into recession, all bets are off, however.

It is quite normal for economies to go into recession. It is also quite normal for countries to run deficits in recession as revenues fall and expenses for social assistance increase. Interest rates usually fall which can help a little on the expense side.

Canada's history with deficits is not "normal". The Trudeau and Mulroney deficits of the 1970s /80s were enormous and saddled Canada with a horrible mess in the early 1990s after a steep recession. Taxes were sky high, there was a lot of wasteful spending and deficits remained stubbornly high. Canadians became almost fanatical (and rightly so) about taming these deficits with some prodding by the Manning Reform party (of which Harper was a key member). The Chretien Liberals, with Paul Martin as Finance Minister, came to power with a pledge to reduce the deficit to 3% of GDP in their Red Book (which turned out to be a huge undertaking at the time). They proceeded to go much further and by 2000, those huge deficits turned out to be huge surpluses. Much of those surpluses were channeled to debt reduction, tax cuts and huge spending increases, all of which helped the economy. Canadians were estatic that the deficit demon was slayed and a virtuous cycle ensued. Canadians have enjoyed lower taxes, higher spending and continued healthy surpluses since. Some of the economic boom of the late 90s and 2000s was due to the tough decisions made in the 1993-1996 timeframe.

In 2000, Chretien and Martin made large income tax cuts and the purse strings re-opened for neglected social spending during the 90s. Luckily the tax cuts were timed perfectly to help Canada navigate through the 2001 US recession. By 2002, when the economic recovery began and Canada still had a surplus, the floodgates on spending began. Strong growth in the economy, in particular Western Canada, allowed Canada to have a surplus, increase spending and make a few small tax cuts.

Enter Harper in 2006, who was elected on a platform to cut the GST to 5%. Despite virtually no support from the business and academic communities and contrary to the trend in most other countries, the election promise was kept. Harper had managed to keep most of his campaign promises and do a solid job of governing the country. The economy was still relatively strong in the face of a looming US recession and the Dion Liberals have had a difficult time gaining popularity. All Harper had to do was put something that the Liberals could not accept and an election would have to be called. Sure, he is no shoo-in for a majority but a solid campaign could have done it.

Now, with the US recession worsening, it is possible that Canada will enter recession. Expect tax revenues to slow and demands for spending to increase. With a cushion of only $5 billion, a deficit is a definite possibilty. Since the Mulroney Tories left a $42 billion dollar deficit and now the Harper Tories may bring it back, it is possible that the Dion Liberals could exploit this development. They should campaign as such: The Tories are irresponsible and only we, the Liberals, are the party of sound fiscal management. The Tories put us back into deficit for a 5% GST.

It could well be the demise of PM Harper as the current Canadian recession leads to a deficit for the first time since the 1990s. If the Liberals can actually deliver a good election campaign, they should capitalize on the huge mistake that Harper made.

Housing Crash in 2008?

One of the few articles about the housing market in Canada that actually has a few negatives in it

The article is below:

A few points:

1) The CMHC says that December was an "extremely cold month in Toronto". Untrue! It was about normal (I looked at Environment Canada and Accuweather's website). Sure, there was a lot of snow and it was colder than normal until Dec 17th but nothing unusual. This was also true of Montreal and Toronto, but out west where all things real estate are hot, temps were relatively normal. Watch the forecast for 2008 to be quietly revised downward in the next few months. January and February were actually very warm out East so let's see if they use the weather as an excuse. The winter of 07/08 was mild and snowy out East. There were colder winters (02/03 & 03/04) in the middle of this boom! Weather is a lame excuse.

2) The industry morons in the US used to say the same thing in 2005 and early 2006. The "it's a healthy slowdown/return to single digit price increases" talk. Now we are about 10% down and probably another 10-20% to go.

3) Interest rates are creeping up despite the central bank efforts. The recent bad news from BMO on its SIV crap are likely to put it into the balance sheet cash hording mode (similar to CIBC and National). 3 of 6 national banks are likely to be lending a little more conservatively despite the Bank of Canada's interest rate cuts. This will tend to keep interest rates higher than they "should" be. Also, expect credit to be harder to get in the future with higher downpayments. This will ultimately hurt the 0% down crowd.

I don't want to put too much stock in 1 month of data. It will take a few months of data to confirm that the housing market is beginning to slow. It will probably take another month of scary stock markets and a bursting of the commodity bubble to really make it obvious.

Nothing continues forever and I just find it hard to believe that despite a credit crunch unparalleled since the 1930s, that Canada's housing market is just going to keep going up 5-10% while the US and UK (and ultimately others) will fall 20-30% and likely go in to recession. Canada will just magically decouple and things will be la-de-da... A more likely scenario is a drop in nominal and real prices for Canadian real estate, in the East and West. The East as we go into recession and the West once things cool off and the commodity bubble bursts.

Housing market's 'sky is not falling'

Garry Marr, Financial Post Published: Thursday, February 21, 2008

New-home construction slumped badly last month but Canada Mortgage and Housing Corp. says there is little fear the Canadian housing market could soon resemble the one in the United States.

On a seasonally adjusted annualized basis there were 187,500 housing starts in December, a 19.6% drop from a month earlier. Despite the decline, there were an estimated 229,600 new homes constructed last year, the second highest level of construction in the past two decades.

"No, the sky is not falling, it really was a weather-related decline," said Bob Dugan, chief economist with CMHC, noting December was an extremely cold month in Toronto, in particular, and that slowed condominium construction.

He said there are plenty of pre-sales for condominiums, which would indicate a lot of activity to come. CMHC is sticking with a forecast of 214,000 for new-home construction in 2008, the seventh straight year starts would top 200,000. One would have to go back 30 years to find a comparable run for the construction industry.

But all is not perfect. Interest rates have been creeping up and the posted rate for a five-year closed mortgage -- the most popular --is 7.59%. Rates haven't been this high since Au-gust, 2001. "They are high for recent months but not if you look at them long term," said Mr. Dugan, who said one of his concerns for the housing market was the possibility of credit drying up.

The credit crunch has not materialized as far as homeowners are concerned, but they are being asked to pay higher interest rates, which, combined with higher home prices, is affecting affordability.

"Despite earlier concerns about the potential impact of the financial market storm on Canadian housing demand, it does not appear the recent tightening in credit conditions has created an undue burden on developers and consumers, and home building clearly remains a pillar of strength in the Canadian economy," said Ritu Sapra, an economist with Toronto-Dominion Bank. "But home affordability is eroding across the nation, especially in the western provinces where it has become common to see huge annual price gains."

Major real estate firms now predict price growth in the existing home market to slow down.

gmarr@nationalpost.com

Did a Canadian recession start in December?

This is a question that few in the mainstream media are asking...

The question needs to be asked but won't since much of what passes as "economic research" in Canada is dominated by the Big Six banks, who have a vested interest in keeping up the bullish spin.

Let's examine the following facts:

1) The US is either already in a recession or dangerously close to one. 2007 Q4 GDP was about 0.6% and projections for 2008 Q1 are for similar numbers. Remember that it often takes a year or more, but these numbers are usually revised sharply lower, meaning that there is a decent chance that the US is already in recession.
2) The UK, Europe and Japan are also slowing sharply and recession is a definite possibility.
3) Canada skipped the 2001 US recession (barely) and has not had a recession for 1990/91. We are overdue as that was 17 years ago! Today's university students were still in diapers at the time.
4) All major stock market indexes are either in a steep correction or a bear market (only time will tell), including Canada.
5) Canada's economy is heavily export dependent. Over 70% of its exports go to the US. Therefore, a US recession has to have a negative impact on Canadian exports. It appears that unlike in 2001, the US consumer is finally slowing down (the 2001 recession was primarily caused by the tech bubble bursting/business investment recession- the consumer stayed relatively strong).
6) I have long thought that the strong Canadian dollar was in Canada's best interest and much of the move was justified and a net positive to Canada's overall economy. The strong loonie kept purchasing power high, and kept interest rates and imported good prices low. Also, since most of our exports are commodities priced in US dollars, the devaluation of the US dollars was more than offset by the huge price increases in those commodities. Look at oil. It was about $20US/barrel in 2002. Now it is at $100. A fivefold increase. Even though the Cdn dollar has appreciated, in Canadian dollar terms, the price of oil has risen from approx $32cdn/barrel in 2002 to $100Cdn/barrel right now. I will discuss later why the strong loonie will no longer be a help.

This recent quote taken from Bloomberg from one of those Big Six economists. At least Millan Mulraine of TD seems to be at least talking about negative GDP although the official TD forecast does not have a recession.

By Alexandre Deslongchamps ( Feb. 19 Bloomberg)

``This (wholesale sales) report adds to a long list of fairly weak economic reports for December, coming on the heels of negative manufacturing shipments and trade,'' Millan Mulraine, an economist with TD Securities in Toronto, said in a note to clients. Taken together, the data will ``drag December's gross domestic product growth significantly downwards -- quite likely into negative territory,'' Mulraine said.

Perhaps a Canadian recession is too extreme. After all, as long as commodity prices enjoy a bull market (CRB, gold, oil, wheat, platinum, silver are all near or at record highs), at least Western Canada should avoid a recession.

Perhaps only a central Canada recession should be on the table (easily more than half the population of Canada). A strong dollar is killing the manufacturing sector in Ontario & Quebec. In the long run, this hollowing out of manufacturing is likely inevitable, but in the short run, it could cause an Eastern Canada recession. When things were humming along in the US, the strong dollar effect on Central Can was offset by a multitude of factors (strong housing and retail sales, strong export markets, spillover from the Alberta boom, etc...). This is clearly a risk now.

And even Western Canada: It does not make sense to me that all these commodities are at record highs? There is a risk in the next few months, that all these commodities head lower and possibly way lower. Why? If much of the western world is at/near recession, there has to be some serious impact on demand. And at these prices, you know that supply will come on. I know about the BRIC and the lower US$ argument, but it does not justify these types of moves. It is eerily reminiscent of the tech bubble. I believe that all of the 2008 move in commodities is speculation. There is nowhere else to hide:

Google/Apple/RIMM/ all other tech: finished
Financials/Retail: dead
Healthcare/Defensive/90% of stocks: not much happening or in a bear market
LT Bonds: not attractive at these yields
Any non-government bonds: In a huge bear market

All this liquidity being pumped in by the central bankers is going into the "hot games", which are the commodities. Many of the charts (ie wheat) look parabolic. Similar to Nasdaq in early 2000. I suspect that the next downleg in the market will be brutal and will take out the commodity stocks, even gold (which should decouple from the rest later in 2008). This will bring out a wave of margin calls, hedge fund blowups etc...This coming commodities bear market (perhaps it is only cyclical) will help sink the Western Canadian economy as well. And once these prices start to fall, the at par Canadian dollar can no longer be completely offset.

If December GDP was negative and if we are negative in Q1 2008 in the US and Canada, the question should AT LEAST be asked: Is Canada in recession?

Instead, everyone says the same thing: A mild US recession will lead to a slowdown in Canada. OK, sure, then why is there talk about a 50 basis point interest rate cut by the BoC in Canada? You don't cut 50 for a "slowdown". You cut 50 because you are worried about recession. You are worried by the worst housing market since WWII. You are worried about the biggest credit crunch since WWII.

I think the answer to my question is: Yes, a recession started. My degree of confidence is definitely not 100%. However, at least the question should be asked by those in the media.All I'm asking is for a healthy debate...