Now it is the shortest recession

First, it was no recession in the US or Canada.
Next, it was a recession in the US but only a slowdown in Canada.
Then, it was a severe recession in the US but only a mild recession in Canada.
Now, it is a severe recession in the US but only a short, sharp recession in Canada.

"Canada’s Deepest Recession Since 1930s May Be Short ", Bloomberg, May 20.

Canada’s recession, likely its deepest since the Great Depression, may also be its shortest.

Let’s go back in time to November 19, 2008 (AFTER the stock market crashed).

Jay Bryan of the Montreal Gazette wrote a laughable article, “Why Canada looks likely to escape severe recession”. This guy writes a horrible column in the Gazette every few days, where he basically bashes the US economy, promotes the Canadian economy and then finds a clueless bank economist to back up his view.

Quoting National Bank economist, Yanick Desnoyers: "I cannot exclude the possibility" that Canada will have a mild recession, he said yesterday, but if so, it will be much less painful than the one south of the border. In terms of the average Canadian worker, for example, Desnoyers expects to see the unemployment rate rise by perhaps one percentage point before job conditions stabilize late in 2009.

Cannot exclude the possibility of a mild recession? In mid November, it was already obvious that we were in a severe recession, and he is hedging on even a mild recession. The Canadian economy has already tacked on almost 2% points to unemployment, shrunk by 5% to 7% for 2 quarters.

Let’s go to July 3, 2008 near the peak of oil and commodities.

"Canada growth rate seen halved but no recession" - Reuters

High commodity prices will help Canada avoid a recession this year but a U.S. slump will pull down economic growth to 1.4 percent, about half last year's rate and below official forecasts, Royal Bank of Canada said on Thursday.After an unexpected contraction in the first quarter of an annualized 0.3 percent, the economy will fare better in the remainder of the year due to support from consumer spending, business investment, an easing of financial market pressures and high prices for energy and other natural resources, the bank predicted in its revised forecasts."Domestic demand is holding up and will more than offset the significant drag from net exports this year," it said.

Yeah, things got much better in the remainder of the year! How did that "easing of financial market pressures and high prices for energy and other natural resources" prediction work out for you?

Let's go back further in time still: January 2008

"No recession in Canada, bank economists say"

Canada's economic growth will slow down this year, but will avoid a recession, top economists at Canada's biggest banks agreed Wednesday.

No need to add comments to this gem.

The five economists don't see a recession in the U.S. either, although some say it will be close.

It is insanity to listen to these same people with their same useless logic. Right now, they are correctly forecasting that the worst quarter of Canadian GDP was in Q1 (for the time being anyway). Even IF we do have a positive quarter, and I'm not convinced that we do, this does not mean that the recession is over! In Q2 of 2008, the US economy had a solid showing (2.8%) before tanking in Q4 (-6.3%). Did the US recession end in Q2 2008?

If you notice the common element in their forecasts: the bank economists always assume that what is up will stay up (commodity prices in early 2008/domestic demand) and when something drops (as everything did in Q4 2008/Q1 2009), things will go back to normal later in the year. I think to these people, the whole recession was just a normal cyclical thing and once it is over, everything will hunky dory again.

Mortgage Rates

Excellent question from a kind reader:

What do you think the 'closed 5yr' intrest rate for a mortgage will be in 5
years time? I have to renew and I have pre-approved for a 5yr closed rate for
3.95%.

I can't "do" advice here, but I will repeat what I said to a family member the other day and what I believe that the facts are:

1) Normally, it does not make sense to lock in for 5 years as you pay a premium.
2) However, these are not normal times
3) Interest rates are at multi-generational lows. Mathematically, mortgage rates can not go much lower, but they can go a lot, lot higher.
4) Those interest rates have begun to back up and I think that interest rates are going much, much higher at the long end over the next few years (ie 10-30 year government bonds) despite upcoming deflation as there is too much supply and not enough reward (ie yield) for the risk of default. I could be wrong on this
5) As we saw in the fall, when bank lending dries up and their cost of capital increases, prime and mortgage rates can vary from "normal". If we get a banking crisis in Canada, mortgage rates could soar even if government bond yields stay low.
6) A run on the Canadian dollar could send Canadian interest rates rising
7) Sleeping well at night and having a super low 5 year rate that can not change would be great to me.
8) My sense is that mortgage rates are going to creep up very soon, as the bond market has sold off sharply in recent weeks.

Job loss hurricane is over, for now

In April, the Canadian economy created 36,000 jobs, almost entirely in self-employed. I am self-employed, but a structural shift of that magnitude does not take place in one month. More likely, you have a bunch of people looking for work who settled for some part-time work and call themselves self-employed.

Nonetheless, and it is risky to base this on one month of data, but it appears as if the job loss hurricane (50K to 100K per month) is over for now. The unemployment rate spiked from 6.2% in October to 8.0% in March, a huge spike of 1.8% for just five months.


As I mentioned back in early February, look for the following in 2009:

I would look for an average of 50-60K in job losses (600K-720K annualized).

I suspect that we are in the midst of a job loss hurricane that is tracking
the steep fall in GDP in recent months. Once this round of job cuts is finished
(spring?), we may get a lull for a few months where job losses continue but at a
much lower pace. Another round may begin in the fall once people return from
summer vacation and realize that the economy won’t magically pick up in
2009.

Welcome to that lull, as this round (357K in 5 months; 71K per month) appeared to end in March. Gut feel is that we now moderate our job losses to something in the 30-40K range for the next few months. That job loss hurricane was a reaction to the sharp fall in GDP in Q4 2008 & Q1 2008, and now that the economy is shrinking at a slower rate, the job market will deteriorate at a slower rate.

I think the risk will now be in the fall months. At that point, I think the stock market and economy will be still be sinking and companies will abandon hope of an economic recovery in 2009. The result will be a big wave of layoffs and a climb toward 9% unemployment. I hope that I am wrong on my estimate for job losses in the 600-700K range for 2009.


My two cents: If you are looking for a job now or to change jobs, hurry before the summer shutdown of July/August and the next round of layoffs in the fall.

Let's leave this blog with a great quote by an esteemed bank economist in February:

“The recession deepened at the start of 2009, and we are likely to see the
jobless rate rise above eight per cent by year end,” warned Benjamin
Reitzes,economist at BMO Nesbitt Burns.

My thought: At this rate, it will be at 8% in April. By mid year, at the
absolute latest. 9% by year end is looking conservative. Remember in the last 2
recessions, unemployment went to 12%.

Fact: It was 8% in March & April. Any tick up and Reitzes' warning will be as useless as most of the ridiculous statements coming out of the banks in recent weeks. A blog on that is needed and in the works...

May Day

All this talk of new bull markets and green shoots has been ferocious in recent weeks.

I wrote in March:

My gut tells me that this is the classic bear market rally that will suck in a lot of people before ultimately going lower. This rally could last a lot longer than six weeks, however, and a sucessful retest at some future point, could allow a rally (or the March lows) to hold for a long period. I suspect that we should be fine until mid/late April and we could test or break the January highs (which would take us to roughly break-even for 2009 YTD). Expect a lot of congratulations by the establishment on their fiscal and monetary tactics as the rally extends. You will hear that the interest rate cuts, the gas price "tax cut", the quantitative easy and the stimulus is working (and it may for a short period).

I don't plan on "believing the hype!". Bear market rallies are not "stabilization" but the natural ebb & flow. I remain very bearish long term but I could change my mind on all of this tomorrow. I plan on discussing the catalysts for the next downleg in a future post, but expect soaring long term interest rates to be part of the problem. At first, sinking bond prices will be welcomed but our overleveraged economy can not survive high interest rates.

At the time, I was long TBT (ultrashort the US long bond). Unfortunately I got stopped out a while back at a loss. Had I held on, I would have had a nice profit.

Here is my roadmap. As I write this, the world is giddy that the end of the recession is near (summer or Q4 at the latest is the current mainstream view). Dow 10,000 talk is back and few talk of retests of the March lows.

I believe that we are nearing an inflection point here. A downleg is starting that should take us to approximately S&P 777ish over the four weeks. From there, we can either start a nice summer rally (back to current levels of S&P 877 or higher to 900-1000) or we can go right to a retest of the March lows. The real move lower will probably start in August 2009, but I am still not sure when. Ultimately, I believe the stock market is going to go a lot lower.

All the congratulations and hype mentioned above back in March are now present, but I am not believing the hype.

The conditions still remain for a severe bear market that will last more than 1.5 years. While 2008 may have been the worst % year of the bear, I do not expect 2009 to wind up positive. There are many factors that need to happen, in my opinion, before a new bull market can truly start:

1) We need a lot more debt to be extinguished. Debt levels are still astronomical. Unfortunately, this means more bankruptcies (Chrysler) and more foreclosures. The process took about 20-25 years, and will likely take at least five years to complete.

2) We need savings to increase. This also will take years.

3) We need the banking system to heal itself. This process has started but there are more failures ahead, including in Canada, I believe.

4) We need the passage of time. It will take a few more false starts like this year's bear market rally to pave the way for a new bull.

There are many other factors (these are the ones that come to my head right now).

I also see a stronger economy in Q3 (contracting but not at -6% or -7%) but I would not rule out some ugly numbers for late 2009 or early 2010. Why? Interest rates. The world has never seen the type of debt issuance that governments are trying to foist on the bond market. There is going to be $4 trillion plus of debt issued by governments this year. Where is the money going to come from to buy this debt? It has to come from other asset classes. Even if I am wrong about interest rates, I don't see how $4 trillion can be floated without hitting other asset classes such as emerging markets. That $4 trillion is an annual figure. Chances are 2010 will require just as much.

I don't think that long term interest rates can be controlled as Bernanke & Geithner are attempting to do. For that matter, I don't think there is much that Bernanke & Geithner (or their successors) can do to prevent the massive debt deflation that is happening. The last thing the world needs is higher interest rates, given the crushing debt loads out there and given deflation.

All this deflation should ultimately lead to weaker currencies versus the US dollar (with the possible exception of the Yen). Again, another "last thing" the world needs is a stronger US dollar, as this will make debt repayment hard for many who have borrowed in US dollars. And finally, the weak financial system, overleveraged and underemployed consumer will hurt the economy and stock markets.

Instead of a double dip recession, how about a double dip depression?

Risk is very high once again.

Disclosure: Long US dollars, Long Yen, short and long various Canadian banks (with intent of being net short one day), short US banks and long SPY puts. I have started shorting again, but very small at this point. I need a move below 850-870 to have me convinced that the top of this sucker rally is over.

Don't stress about stress tests

All this talk of stress tests! The whole thing is silly. Similar to having a student (bank) and teacher (government) negotiate a grade for a report card. Another silly idea by Geithner that will do little to impress anyone.

A true stress test would find most financial institutions in the US to be insolvent. The "adverse" conditions laid out in the stress tests are a base case, while the base case is a joke (2010 unemployment at 8.8%, near current rates- even if you think that the economy is going to grow in 2010, unemployment usually peaks for 2 years after a recovery).  There are so many assumptions involved that the test is being rigged.

Anyway, I think that the market is smarter than the stress tests, and that these stress tests will be a tool for government to either put more money in the banks or force the banks to do things that they may not have done otherwise. The bad banks (C, BAC) will need to raise money, but the market knows this. The market may well yawn at the results of this rigged stress test. I believe it is heading down anyway, and perhaps reporters will assign blame on the test, but I think much of the test has been leaked and dismissed as a big joke anyway. The real surprises are usually hard to forecast. Perhaps the banking sector surprises are going to come from non-US banks (Canada or Europe?), I believe, and they will not be telegraphed.

Right now, everyone thinks that JP Morgan and the Canadian banks walk on water. Somehow, I doubt that when this recession is finally over, people will be saying that. 

That is the history of these things.

More Bank of Canada stuff

Back in January, I asked: Has Carney lost it?

I won't rehash, but clearly he has tempered his ridiculous tune from three months ago, in his update last week.

The recovery has been pushed out a quarter and tempered a little for 2009, but 2010 remains relatively robust. I still think that he is guilty of dreaming in technicolor but the thing that stuck out for me was the following:

Conditional on the outlook for inflation (emphasis mine), the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.

He has now pledged to keep interest rates at 0.25% for 14 months at least provided that inflation stays in check. There is no mention of exchange rates. I am not quibbling with the rate cut or the statement, just wondering aloud:

This is not my forecast although it is a possibility in my view: What if the Canadian dollar drops back to 62 cents or worse (if falling commodity prices and stock prices continue later in 2009 and 2010)? Is there any scenario where the Bank of Canada would have to step in to raise interest rates to defend the currency? Is that price lower than 62 cents? Is it 50 cents? I remember a time in the early 90s when the Bank of Canada was forced to raise rates by 2% to defend the currency. Once again, I am not predicting this, but given the speed that the Canadian dollar dropped in the fall of 2008, a 62 cent dollar in this recession is not impossible. Obviously, if the Bank of Canada feels that it needed to raise rates, it would do so, regardless of the statement above. I am just wondering:

1) if it even has a plan for a run on the loonie (I suspect that it does)
2) if it does, did it purposely leave out mention of the loonie in its statement above because it would incite fear and would serve little purpose (I suspect this to be the case)?
3) Does this statement come back and haunt the BoC one day, if they have to reverse course, and/or does it give speculators the ammunition to launch an attack on the loonie since the BoC has pretty much ruled out an increase?

FYI: I am long both Canadian and US dollars but getting longer the US here and less long the loonie with every passing day. I see a move to the 76-77 range, and if that breaks, to the low 70s. I can also see a run at 62 cents, if the doom and gloom returns.

Six weeks is over

The "mother of all bear market rallies" has now completed its sixth week with a 30% gain. As I stated in March, I would give this market the benefit of the doubt for six weeks. I am happy that as someone labelled as a perma-bear, I was able to see this coming.

However, Adil Burney the forecaster was much better than Adil Burney the trader.

-First of all, I got whipsawed out of most of my longs at the end of March on the sharp 2 day pullback. Certain things caused me to think twice and I was not able to reenter my longs as the market soared in April, as I had expected.
-My few longs have stunk (gold stocks), but I feel very bullish in the long term on this, so I am allowing some leeway for these.
-The good thing was that I converted almost all of my US dollars to Canadian dollars
-The best thing for a bear like me though was that I did not short. I suspect that we will hear of a few blowups on the short side (30% in 5 weeks will do that) in the next few weeks.

Where do we go from here?

-I think the "easy move" (it wasn't that easy!) is over. I don't think that we test the March lows or anything just yet, but after 6 straight up weeks (with only modest 2 day selloffs) and 30%, a nice Fibonnaci 38% retracement may be in short order. That would take us to S&P790-800ish (or about 10% off the top).
- I am still very bearish on the intermediate and long term, but I am weary of shorting just yet, as we must allow for a further rally later this spring/summer. The problems in the economy are too deep and there is way too much bullish sentiment out there in my opinion.
-I will watch the action in the coming days and make adjustments accordingly.