Friday, February 1, 2019

Canada’s home-made recession

Why would the U.S. be booming while Canada is on the point of going in recession?  Why was the U.S. economy so tepid under Obama and so vigorous under Trump? The same answer: Canada is mismanaged and NOT business friendly. Under Obama, the U.S. had turned business unfriendly. You see, Trump maybe in many ways despicable, but he knows how to get the economy going. Trudeau may know about virtue and environment (in fact I doubt even that), but he is an enemy to Canada’s business and, don’t forget that it was NOT Bill Morneau who build his Dad’s business.  These silver spooned Liberals have no clue of how the real world works and they have a nearly four-year track record to prove it. I say that wrong, because we should add to that the track record of Trudeau Sr as well. Father and son can boost creating a highly divided Canada, poor economic performance, destructive resource policies, escalating debt and elitist, anti-middle-class policies.
The U.S. economy may be peaking though, however I think it rather is a moment of economic reflection followed by more economic growth. Yes, earnings have jumped because of the U.S. tax reform yet, I think many confuse the effects of a very strong U.S. dollar with reduced earnings in the U.S. economy.  The S&P500 has nearly half of its earnings from outside the U.S. where many countries are teetering on the edge of a recession. For all practical purposes China is in a recession masked by its typical emerging market growth pattern.  When converting already weak earnings outside the U.S. in strong U.S. dollars then it is no wonder that S&P companies report less growth compared to last year.

87% of the U.S. economy is driven by the U.S. consumer not exports. Now after many quarters of central bank interest rate hikes, we start to see also a slow down in the U.S. itself. The message to the Central Bank is, yes normalize rates but don’t kill the economy. That is what is behind the recent dovish comments of Jerome Powell.  Don’t forget that interest rates since the bottom 0.5% Fed funds rate have more than quintupled to 2.5%!

The low interest environment combined with the large share-buy-back programs have inflated U.S. corporate debt to enormous height while many companies saw their interest rate charges go up much more that 5 times. That is why so much U.S. corporate debt with modest investment grade debt ratings are  about to be rated as high yield junk. No wonder earnings in the U.S. are peaking.

U.S. government debt has also sky-rocketed not just under Obama but also under Trump. If interest rates go up, the U.S. government (and also Canada’s) have to pay more and more interest at the expense of moneys that could be invested into our society. It looks that the U.S. is on the point that increasing debt is like ‘pushing on an economic string’ and Canada has been doing that already much longer under JT. Sorry guys but Canada’s credit card and now also that of the U.S. are quickly reaching the credit limit.

Stalling or falling interest rates are what can temporarily halt the resulting economic decline. The ‘high’ interest rates already affect the overheated Toronto and Vancouver housing markets. Some real estate markets in the U.S. are now also displaying weakness.

But it gets time that China’s economy will turn around again and also India’s and that of other emerging markets. I think that the commodity driven economies will benefit from this. Meanwhile many North Americans can no longer be bothered to buy small cars and want to use the recent gains in automotive fuel efficiency to buy SUVs instead of family sedans.  Yes, Permian oil output is peaking but often at the expense of profitability and with high production decline rates in basins such as the Permian this may result in a plateauing of U.S. production while drilling programs keep on growing to offset the aforementioned production decline.
Don’t think that low oil-prices are here to stay and… the amount of natural gas in North American storage is now at decade low levels. Pipeline constraints may limit Canadian gas production until pipeline East is restored to its previous capacity. Thus, I foresee the continuation of the age-old pattern that switches between booming commodity and booming industrial/service economies. It is time for Canada’s resource economy to outperform the U.S. once again. And if Canada does not want to continue subsidizing authoritarian regimes such as Saudi Arabia then it must become serious about energy self-sufficiency and support expansion of our infrastructure. Not only oil and gas pipelines but also research our options for other forms of energy rather than taxing and obstructing our energy economy.  Basically, we need ALL energy that we can lay our hands on and if we can do so with a low imprint on the environment so much the better. But don’t think for a moment that destroying our energy industry is good for the planet because that is not only a pipe-dream but it also destroys Canada as a country. Come October, in God’s name get rid of Trudeau!  How do they say?  Let’s make Canada great again!

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