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VERICO Economic Consultant: Michael Campbell Quarterly Highlights Q3

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Quarterly Highlights Q3

Michael Campbell

5 NUMBERS YOU SHOULD KNOW

$300 billion

THE A MOUNT OF MONE Y THAT E XITED CHINA BET WEEN JULY AND MID -SEPTEMBER .

Where did it go? Think upper end of the real estate market.

82%

50.2% THE DROP IN OIL PRICES BET WEEN SEPT 23, 2014 AND SEPT 23, 2015

the percent of analysts in August who predicted that the Federal Reserve would raise interest rates in September.

Oops.

38%

the decline in the CRB commodity index, (measuring 19 major commod ities), in the 12 months.

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THE NUMBER OF EMERGING M ARKET COUNTRIES THAT HAVE E XPERIENCED A STOCK M ARKET CR A SH IN 2015.

Quarterly Highlights Q3

Michael Campbell

Quote of the Month

“A global recession starting in 2016, led by China is now our Global Economics team’s main scenario. Uncertainty remains, but the likelihood of a timely and effective policy response seems to be diminishing.”

Citigroup’s chief economist Willem Buiter

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Quarterly Highlights Q3

WHAT’S GOING ON: AT A GLANCE • Canada’s economy continues its slow motion recovery.

• The oil price decline’s not done yet.

• China’s economy continues to slow.

• Emerging markets have a major debt problem.

• Europe’s economy continues to flat-line.

• Deflationary fears are keeping central bankers up at night.

Michael Campbell

Quarterly Highlights Q3

Michael Campbell

WHAT’S GOING ON Slow growth – or as Bank of Canada Governor, Stephen Poloz put it – “serially disappointing economic growth” has been the story through-out the world since the credit crisis in 2008. What most analysts – and every political leader fails to understand is that we’ve entered a period of deflation.

That means if you want to make an all encompassing bet – put your money on slow growth, low interest rates and weak commodity prices.

Or put another way – just look at what’s going on in Calgary. Last year Calgary sported the second strongest GDP of any major city in the country at 5.1% (Edmonton was tops at 5.2%). This year it will be lucky to escape with a .5% decline according to the latest from the Conference Board of Canada. And I think they’re optimistic.

The impact of the decline in oil prices has been underestimated every step of the way by every major financial institution including the Bank of Canada.

It was never just oil that was caught in a downdraft. It was virtually every commodity from natural gas to copper to potash. And the reduced activity in the resource sector impacted retail, real estate, and services in resource dependent communities. Presto – Canada’s overall GDP numbers remain anemic.

Now throw in the decline in China’s economy, which puts downward pressure on commodity prices because of reduced demand and it becomes tough not to conclude that upward pressure on commodity prices is a long way off.

Interest Rates The slow economy means that there is no upward pressure on interest rates because of increased demand. There’s also no inflationary pressure pushing rates higher. In other words, there is no reason for interest rates to move up in the foreseeable future. We would need a major turnaround in other parts of the economy besides housing to get the Bank of Canada to move rates higher – and it will take 9 months or more to get the data to confirm the increased economic activity needed to push rates higher.

Oil Prices We are entering the shoulder season between the increased demand due to summer driving and winter heating – so demand will slow over the next two months. Global supplies continue at record levels with an estimated 3 million surplus barrels of oil being produced daily.

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Quarterly Highlights Q3

Weak demand and strong supply is not a formula for higher prices. My own prediction made in the spring of 2014 when oil was still over $100, was for prices to test the 2008 lows of $31 to $35 this fall. We’re getting close.

Just as importantly for the oil producing economies in Alberta, Saskatchewan and Newfoundland the lofty days of $80 oil, let alone $100 are behind us for the foreseeable future. Especially with new supply coming on board from Iran later in 2016.

The point is that there will be no “V” bottom. There will be a new lower trading range.

Michael Campbell

Toronto and Vancouver are Different It’s no coincidence that the two economic bright spots in the country - Vancouver and Toronto – are the major beneficiaries of international capital in search of safety. Upper end real estate has been the major beneficiary, which has been further spurred on by the 20% discount offer by the declining loonie versus the Chinese yuan over the last 2 1/2 years.

The lower end of the residential market is more impacted by record low mortgage rates and increased demand due to in-migration that far outstrips new supply.

The Keys For Recovery Canada’s recovery will depend on renewed US demand, which accounts for about 75% of our exports AND the weak loonie. That’s about all the export side has going for it at this time given the anti-business policies initiated in Ontario and Alberta.

Sadly, every Canadian province and every major city has raised taxes in the last year. Raising taxes and other mandatory fees on individuals and businesses are always a detriment to economic growth.

As Winston Churchill warned, “a nation trying to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

What I’m Watching Do you remember the budget shutdown in the US during the first two weeks in October, 2013. That’s when we first got introduced to the term sequester. In the aftermath of all that drama that saw approval ratings for produced both the Democrats and Republicans decline, the two parties reached an agreement that

Quarterly Highlights Q3

Michael Campbell

assured budget peace for the next two Emerging markets are in a real mess. years. Well the new agreement expires on They’ve borrowed trillions in US December 11th – let’s see what happens. denominated debt, which is getting more expensive by the day as their currencies fall along with government revenues in I will be keeping a close eye on the stock, the aftermath of the commodity decline. bond and currency markets to see their reaction. It’s just one more element of uncertainty coming at a time when there It’s not a question of “if” these countries is already plenty to go around. like Venezuela, Brazil, Chile and Turkey will implode – it’s when.

I’ll also be watching for evidence of the next leg of the debt crisis, which I’ve predicted will begin in earnest in the fourth quarter. You can make a good argument that it’s already here. Last week, Japan, and France had their debt downgraded. The week before Brazil was downgraded. In August the debt of the European Union was downgraded. Debt, especially at the government level, and unfunded liabilities are still the major overriding financial issues going forward.

Click to see Michael’s Video Update

The question is what will that do to the credit, currency and stock markets worldwide. My guess is that after the initial shock, the debt problems will further push capital into the US forcing the dollar up. The uncertainty in the emerging markets, especially the fall-out from China’s problems has already been a major factor in the Federal Reserve’s decision to not raise rates in September.

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Quarterly Highlights Q3

Michael Campbell

3 points

Regarding the Federal Election Campaign

36 million Canadian Consumers

1. Despite what you read or hear in the media– regardless of the party in power, no Prime Minister is going to “manage, run or control” the economy.

Governments cannot control the actions of 36 million Canadian consumers, 321 million US consumers (who we need to buy our exports), 1.37 billion Chinese (who we need to buy commodities and push prices up).

2. All the talk of government job creation plans is dangerously superficial because it ignores the ability of municipal and provincial governments to foster or sabotage job creation.

321 million US Consumers

1.27 billion Chinese Consumers

It’s also nonsense to talk about job creation while at the same time increasing the tax and regulatory burden on business. That’s not ideology, that’s common sense. The most recent report by the Canadian Federation of Independent Business estimates that business pay $11 billion needlessly due to useless regulations.

3. FYI - the economic research is consistent in concluding that the least economically disruptive way for governments to tax is through sales taxes, followed by income tax. Increasing corporate taxes is the most detrimental to economic growth because it decreases the incentive to invest and grow. Ironically increased corporate income tax regularly results in lower government revenues. Corporations tax plan or change jurisdictions as so many did in BC and Ontario in the 1990s in response to increased taxes.

Quarterly Highlights Q3

Michael Campbell

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It’s nonsense to talk about job creation while at the same time increasing the tax and regulatory burden on business. That’s not ideology, that’s common sense.

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