In today's Breakfast with Dave, David Rosenberg (Rosie), Chief Economist, Gluskin Sheff, sets the record straight about being his being bearish the US and bullish Canada.
[CSSBUTTON target="https://ems.gluskinsheff.net/index.ncl.html" color="002266" textcolor="ffffff"]Sign Up for David Rosenberg's Market Musings Newsletter[/CSSBUTTON]SETTING THE RECORD STRAIGHT
I get this all the time; how can you be bearish on the U.S. economy and the stock market and also be calling for an elongated period of credit contraction and still be bullish on Canada and commodities?
Well, here goes:
The U.S. credit crunch began in July 2007 (it took the stock market three months to figure it out). The Fed cut the discount rate in August 2007 so it began to be very nervous. And the GDP recession began in December 2007.
When did the Canadian stock market peak? How about June 18, 2008, at 15,073, which is almost a year after the U.S. credit crunch began and six months after the onset of the U.S. recession. At the peak in the Canadian stock market, the S&P 500 had already sagged by almost 15% from its prior highs. The two markets did not hit their peaks at the same time, believe it or not.
And when did the Canadian dollar peak? How about May 21, 2008. Again, 10 months after the credit crunch began. Go figure.
Oil peaked at $145/bbl in July 2008, which is nearly a year after the beginning of the credit collapse and seven months after the U.S. recession began. The CRB also peaked in July - from the time the U.S. recession began to the peak seven months later, commodity prices were up 15%. I would therefore have to assume that there is a very loose connection between the U.S. economy and the performance of resource prices.
In fact, the U.S. was more than a half-year into an economic downturn and a full year into a credit collapse, and copper was still north of $4 a pound; wheat over $10 a bushel; and soybeans above $15 a bushel. At the time these commodities were hitting their highs, not only were U.S. Baa credit spreads in excess of 300bps (from 160bps at the height of the credit bubble) and S&P financials were down more than 40%! Again, go figure.
The reality is that during the first nine months of the U.S. recession, China's GDP (its imperfections notwithstanding) was still expanding at an average annual rate of 8.9%; India by 6.7%; Brazil by 6.7% too; Russia by 4%; the Philippines by 3.7%; Korea and Thailand by around 2.5%. So the rest of the world did not exactly go to sleep just because the U.S. economy became comatose for a period of nine months. But when Lehman collapsed and global trade finance vanished and it became impossible to secure export credits, well then, it was vertical down everywhere.
So at least we know that it will take to pull the rug from underneath the commodity sector, the Canadian stock market and the Loonie - not just a U.S. recession; and not just a contraction in credit; but a major financial event that infects the entire world economy and trade flows. We certainly are not bullish on the outlook, but nor are we calling for a resumption of the awful destabilizing conditions that prevailed a year ago.
Meanwhile, despite the fact that the U.S. consumer cannot seem to revive without ongoing government life support; despite the fact that 130 U.S. banks have failed so far this year; despite the fact that consumers have had to liquidate their debt for each of the past nine months; despite the fact that 1 in 7 Americans with a mortgage are either in arrears or in the foreclosure process; and despite the fact that the U.S. has shed four million jobs through the first 10 months, commodity prices are up more than 30%, the Canadian stock market is up 27%, and the Canadian dollar is up 14%. Go figure.
