My musings on the economy, life, technology, business and things I find interesting.

Tuesday, July 8, 2008

Entertaining a Canadian Economic Collapse

Overall I'm pretty bearish at this point, if I was an American I suppose that view would fit right in, but I'm not and the Candian economy has been anything but bearish, it's been down right bullish amidst the credit crises, as is evidenced by the following yearly chart of the TSX vs the S&P since the market top in October 2007. Even Canadians are starting to feel that something is creeping up on them so I think this is a timely piece.

Some Observations
  • TSX is pretty much flat for the year vs almost 15% loss for the S&P
  • Since the market top the TSX and S&P are down 3.69% and 18% respectively
  • The TSX is just starting to break down
  • This is as of July 08 and doesn't include the spectacular thrashing the markets took today, as of today the S&P breached bear market territory
  • The money we've been managing is showing about a 5% return year to date using largely market neutral positioning, so we're up 25% relative to the S&P - that's considered extremely good.
  • You're fortunate if you're in cash as there are plenty of bargains available at these prices - but choose carefully

Why on Gods green earth the markets could collapse
  • Trillions in derivatives with counter parties that couldn't cover in a crash
  • A US economy that has shipped its manufacturing base, expertise and hard work ethic overseas in exchange for a "service economy"
  • US is incurring a massive ongoing trade deficit
  • Rising personal and corporate default and bankruptcy rates
  • Consumers and businesses cutting back in ways not seen in long periods
  • 90% of recessions were preceded by significant housing market declines
  • Canada's markets are being held up by commodities and commodity pricing growth looks like it's in bubble territory
  • A very large percentage of Canada's GDP come from US spending
  • Massive printing of money(inflation) has created the opportunity for either a US dollar collapse or a deflationary spiral
  • Confidence at all time lows
  • Government leadership in the US unwilling to confront the problems head on and eager to socialize all the problems of the country
  • Deficits in health care, pensions, social security, etc.
  • There is massive pressure on wages and hours worked - the unions and governments will be helpless to stop this. Those that fight it will go out of business. Just look at the mass Ontario plant closures. We trained them in our schools and sent them home to do it for less, what did we expect?

What this means for Canada
  • We aren't different but we've planned better then the US
  • We will be effected but not as severely
  • People will cut back, and it will be good for our behaviour
  • People assets will lose value and it will teach us wealth doesn't come free
  • Confidence will plunge and this will reset expectations
  • There will be areas where people will still make money
  • There still will be opportunities

What that means for Kitchener Waterloo
  • Local companies profits will slow down or contract
  • Population growth will slow
  • The real estate market will cool down
  • Our manufacturing base will continue it's contraction
  • People will spend less
What if things get really bad
First off lets be sure everyone understands what really bad means, because really bad could completely change how you look at things:
  • You lose your job and so do most of the people you know
  • Your assets tank in value
  • Pensions move from underfunded to essentially worthless
  • The tax base shrinks and so do most public services
  • Peak oil ends up being true and oil prices surge
  • War between oil producing nations shuts down supplies
  • Aviation and trucking become prohibitively expensive
  • Commuting for more then 5km become prohibitively expensive
  • Trucker strikes prevent goods from moving
  • Energy shortages start effecting how people heat their homes
  • A world of specialization and focus that isn't viable any more leaves many without purpose
  • Social unrest begins to push a civilized North America back into much less civilized and organized time.
Is this likely? I don't personally think so. I think it's possible, but not likely. I think there is validity to the statements made by people like Jim Kunstler, but I think he under estimates the ability for people to change when under immense pressure. I think that it's going to take some serious pain to wake up the west from its culture of entitlement and that might take us through some serious capitulation. I don't think the proverbial poo will hit the fan in an end of the world way.

In Kitchener-Waterloo where I live we benefit from one of the most robust economies in North America, so what I'm saying may very well sound silly to local readers. Silly it is not, and silly it would be to ignore these macro movements if you have money in the markets.
If you have a pension, insurance, mutual funds or a job, you've got something in the markets. So be defensive, these are dangerous times.

No comments: