Is it not bad enough that the US economy has every sign of at minimum a significant slowdown, but quite possibly a full recession?  To top that off, the rescuers are either not making themselves known, or those that are for sure part of the rescuers have no foggy idea what to do?

First let’s add more fuel to the fire of whether the US is in trouble:

1.    Last week all major retailers confirmed what we all feared…they had a lousy holiday season for sales. The worst in five years to be sure.  Wal-Mart of course was excepted as they had a decent increase in volume, BUT that was at SIGNIFICANTLY reduced prices.  What happens down the food chain when Wal-Mart squeezes?  Exactly all the little guys hurt immensely.
2. The US labor Department just reported their  jobless rate has  spiked to 5%, and expect fully for it to reach 6% by year end.
3. Goldman Sachs joined their friends in the investment community by sating they are 100% forecasting a recession.
4. Moody’s investor service has reported the unthinkable. The Triple A rating that US government debt has had since 1917 is in clear danger of being downgraded, due to “out-of-contol government spending on health care and social security”  I am sure they could have added many more reasons, but this is all they mentioned.

The concern seems to be over the general lack of urgency by the rescue brigade.  This could very well be because they don’t know what to do, but doing nothing is really sending a bad message to the world.  Unfortunately you see when the US has a party and has spent all their money etc. the rest of the world feels a bit hungover…especially in Canada.

Their is also the real concern that it doesn’t matter what they do it will not work and we just have to buckle our seatbelts and be ready for a little bit of pain.

Hear is the sad part though, as I have mentioned before the ones who will feel the most pain is of course not the ones who caused this but the victims.  Mistakes were made, people will lose their jobs, but many more will lose their homes.

Not the Lax regulators, or Bernanke and his very relaxed predecessor Greenspan, who arguably with his easy money policies, and not reeling in predatory lenders turned the housing market into a mess.  What about all the people who improperly sold the investment pools?

I say they need to stop saying “we don’t know what we don’t know” and figure it out…fast, real people are getting hurt and the world will feel this pain for some time.

Merrill Lynch has gone boldly out today and predicted that the Bank of Canada could drop short term interest rates down by as much as 1.75% this year.  If that were to happen we would see the prime rate drop to 4.25%.

Now, will it happen?  This is largely based on what many economists are saying is an inevitable recession in the US to come in the first half of the year.  IF that comes or for that matter even if it is close this will no doubt bring slowdowns to Canada.

I can tell you this.  I believe there is a slow down if anything to be felt in Canada, likely not an official recession (2 quarters in a row of negative growth) but definitely slower.

There is another side to this.  IF, or maybe we should be saying when, the bank of Canada does drastically reduce short term rates, this will likely weaken the Canadian Dollar, which will be good news to many businesses especially in Ontario.

Here’s a new one…Credit Card companies in the US have managed so far to stay out of the news on the Sub-Prime bebacle but as we all know you can run but you can’t hide.  Seems like many hundreds of millions of dollars in sub-prime credit card debt was also packaged and sold off as investment grade debt!

The data for October has just been released, and debts over 30 days in arrears has risen 26%, debts over 90 days in arrears has risen an alarmingly 50%,  and finally debts that have become unrecoverable, meaning the bank has given up on collectin, rose 18% to $961 million!!

Turns out all those sub-prime mortgage holders that were sold these dangerous mortgage products also picked up a credit card.

I can imagine the scene now…

Picture when Mr. sketchy credit came home one day and said “Honey, you won’t believe this, I just re-mortgaged the house to 100% of it’s value, which means we were able to pull-out $50,000 in cash, and to top it off they also gave us a $10,000 credit card with no questions asked!!  Let’s go buy a new car, those new appliances you wanted, and let’s go on that big trip we have always wanted, we can put it on our credit card. The best part of all is that our payments will actually drop because we get this really low rate right now.  Jimmy the crooked mortgage broker told us that in two years we can do it all over again, and keep staying at these low rates, isn’t it great?”

This is really sad, and honestly I feel for those people.   They were sold a bill of goods that was not good, and now good people are losing their homes.  Sad, really sad.

Interesting development with the growing global fallout due to the worsening US Sub-Prime mortgage mess. Globally banks need money, and they need it fast. So who has money? Rich people in Asia and the middle East.

Already the amount of investment in bank stock has risen to five times what it has been. UBS a global bank based in Switzerland just received a bailout of $11 billion form investors. $9.75 billion from the government of Singapore in exchange for a 9.75% equity stake, the remainder is said to come from the government of Oman.

“The [banks] desperately need new money – and the people who have it are in the Middle East and China,” explained Kenneth Rogoff, a professor of international economics at Harvard. “I think there’s a recognition of how dark the economic situation is, how vulnerable it is. Once Americans get used to this idea, we’re going to see even more of this.” (source: Reuters)

Last month Abu Dhabi’s investment arm paid$7.5 billion for a stake in Citigroup. Kenneth Chen, who is in charge of the massive Qatar Investment Authority $60 billion fund that there are “tremendous opportunities” for funds such as his to take advantage of the incredible buying opportunities in the US financial industry.

The good news is of course that the financial industry is getting their white nights and should be able to survive the crisis and hopefully we can get back to a normal market sooner then later. I will let you decide if you think it is bad that these middle east and Asian governments having such unprecedented stakes in our Banks.

Obviously the most common thing for people to do at this time of year is make New Years resolutions. However the other popular thing to do is to make predictions for the year ahead.  Some economists have just done this recently, i will collect their thoughts and the most relevant ones here:

The general consensus is that the Canadian Dollar will remain around par all year. The Us economy will slow further, and the markets will be equally as disruptive as they were in the summer of 2007, although they definately agree that there seems to be a light at the end of the tunnel.

1.  Ernie Ankrim, chief investment strategist at Russell Investments, agrees that markets will be disruptive, but he seems to think this will subside in the second half of the year.  Additionally he goes on to suggest that early 2008 will continue to have turmoil in the markets due to the sub-prime mess not finishing until mid year.  He believes strongly though that again by the second half of the year more transparency will be the norm in the markets that will finally bring liquidity to the structured markets.  this will be cause for much celebration in the markets.  it will be our job to ensure if the liquidity returns to normal that we push the lenders to lower their psreads and bring lower costs to the consumer. More on that as the year develops.
2. Ben Joyce,  director portfolio Strategy,  BMO Capital markets  suggests that the continued uncertainty and difficulties of the  fall-out  from  the  sub -prime  mess will not push the North American markets into a recession.  As we have been saying Ben says that the problems in liquidity in the market are an issue of confidence, NOT a fundamental prelude to a bear market or a recession.  Ben goes on to say that he expects the Bank of Canada to continue to cut rates throughout the year.  This is good news of course.